Explaining Insurance Power Of Attorney Requests

BAY COUNTY FL - “My new insurance company wants me to sign a Power of Attorney/POA.  Wait a minute! What’s going on?”

A Power of Attorney is a very serious document and is something that should always be approached with care. It grants someone else the legal authority to act on your behalf. Just signing over that power to an insurance company seems a little weird, right?

There are cases, though, where a Limited Power of Attorney makes sense in this context. Some insurance companies are known as “reciprocals.” This means the insurance company is owned by the policyholders rather than stockholders. So, if you have a policy with a “reciprocal” company, you actually own a tiny sliver of the insurance company. Think of it like buying a share of stock in Amazon. Among the more well-known reciprocal insurers are USAA, Farmers, and Tower Hill.

There are two practical things you might notice when obtaining a policy from a reciprocal. First, you’ll make a “capital contribution.” You may not notice it because it’s included in your premium bill, but it may be up to 10% of the premium. This is combined with other policyholder monies and is used to pay claims. Any leftovers could be returned to you when you leave that insurer - like a dividend - but most of this money will probably be used to pay claims.

Back to the POA: This document is essential, and doesn’t impair any of your policyholder rights, like the ability to sue your insurer if you should have a claim dispute.  It’s just signing over your rights as an owner to a third-party manager to manage the company on your behalf. Referencing the Amazon stock example, buying a share of stock in Amazon doesn’t give you the right to take an Amazon truck for a joy ride or make Amazon hire your cousin. You would have the right to vote your share at an annual meeting, but that doesn’t mean much in practical terms.  The POA form you sign for a reciprocal gives the manager the right to vote your share of ownership. Now, I don’t know about you, but I don’t have the interest, or ability, to run a big insurance company.

Therefore, in this situation, a POA is not only normal, but essential, because you can’t have 10,000 people running an insurance company. Remember: you should read any document before signing it, of course, and if you don’t understand it, ask your agent to explain it in language that makes sense to you.