What is a Principal in Insurance | A Detailed Guide by Expert

In most cases, a principal is also an insurance agent or broker that supports your clients with insurance purchases. A “principal” is someone with whom you have entered into a contract or agreement to perform work or services for your company. This could be a written contract or agreement or another legally enforceable contract. Specific insurance policies define “principal” clearly and require written contracts. Others may choose to omit this parameter entirely.

What is the Principal’s Liability?

What is a Principal in Insurance

If you are responsible for any incident that occurs due to the work you did for them, the company (principal) will expect you to protect the company. 

How do I know if I need it?

You’ll almost probably require principal’s liability insurance if you act as an agent for another company. In addition, if you sign a contract or agreement that requires you to carry insurance for your principal, you’ll need this policy.

Do I need both public and principal liability and just one type?

Generally, a principal’s liability or indemnity insurance policy is not separate from liability insurance. The system often includes it in a general liability policy covering liability and product liability. The main coverage of the principal is in the policy definition of insured. In addition, the policy details the coverage provided to other parties associated with the covered company, such as principals.

What is an example?

For example, a consumer visits Supermarket Pty Ltd and buys a box of cereals produced by your company for Breakfast Cereals Pty Ltd. He discovers that it contains a screw and, while eating the cereal, bites into the screw and breaks a tooth.

When Breakfast Cereals Pty Ltd receives a claim from a customer for compensation to repair the tooth, Breakfast Cereals Pty Ltd will expect you to compensate them because the product you delivered to them contained no screw. They are aware of this because a metal detector scanned it before leaving their premises. 

Why do I need it?

Agents’ liability insurance can protect your interests by taking care of the agent and compensating you for your negligence, depending on the circumstances of the claim. However, if you are found not at fault, the policy may also cover certain costs associated with defending against the prosecution.

CGU offers liability insurance that includes principal’s liability and can be tailored to your company’s specific needs, regardless of its shape or size.

Principal Insurance: Key Takeaways

What is a Principal in Insurance

A principal chooses an agent to act in its interest and on its behalf. For example, an investor may select a fund manager or engage the services of a lawyer for legal work. If interest is present, a clash rises between the principal and the agent. The principal-agent relationship is either expressly in writing or implied through behavior.

Understanding a Principal-Agent Relationship

The principal-agent relationship has its formal terms in a contract. When investors purchase an index fund, they act as principal and the fund manager as the agent.

As an agent, the index fund manager’s responsibility is to manage the fund, which comprises the assets of numerous principals, in a manner that maximizes returns for a given amount of risk by the fund’s prospectus. Agents must perform their work with a specific level of expertise and care; they may not do so knowingly or negligently.

Any willing and able party may enter into a principal-agent relationship for any lawful transaction.

In simple circumstances, the principal is a single person who delegates duty to an agent. On the other hand, other relationships are disguised as this and have a principal, a corporation, a non-profit organization, a government agency, or a partnership.

Typically, the agent is a human being capable of understanding and, eventually, performing the work set out by the principal. The principal-agent relationship performs to hire a contractor to perform home repairs, hire a lawyer to serve the legal profession, or hire an investment advisor to diversify a portfolio of stocks.

In each case, the principal requests the professional’s services or advice, and the agent is the expert who performs the work.

Special Considerations

As long as the principal provides reasonable instructions, the agent is responsible for fulfilling the responsibilities assigned by the principal. 

Implicit in the principal-agent relationship is also a duty of loyalty. It requires the agent to avoid placing itself in a position that causes or invites a conflict between its interests and those of the principal, a situation known as the “principal-agent problem.”

What Is a Principal-Agent Relationship?

For special or general reasons, the agent assumes the role of the principal. The agent must carry out the principal’s wishes in their capacity as principal.

The principal is someone who allows the agent to act on their behalf, whereas the agent is the one who acts on the principal’s behalf.

How Does a Principal-Agent Relationship Work?

There are numerous examples of how this often manifests itself in business and everyday life.

Your company’s shareholders appoint board members to benefit from their expertise in running a company. So, you hire people to do business with clients.

You could do all of these tasks alone. You could spend time locating listings and haggling over the asking price. He could spend his time answering the phone and serving customers. However, there are productive ways to spend your time, and some projects may not suit your skills. By delegating these responsibilities to others, you can maximize your time efficiency.

Frequently Asked Questions

What is a principal-agent in insurance?

It is a contracts producer entered into by the agent. These are contracts of the principal.

How do you prove a principal-agent relationship?

To create a partnership, both parties must agree (principal and agent). When authority is communicated vocally or in writing, consent can be stated or inferred.

What are the different types of principal-agent relationships?

  • Senior executives and stockholders
  • Fund managers and institutional investors

How Is an Agency Relationship Formed?

A party may agree to act as an agent for another party through a third party. Sometimes their activities convey to a third party the impression that another person is acting on their behalf (when they are not).

Bottom line

In confusing situations that generate debate, it may be necessary for a court to step in and determine the existence of the principal-agent relationship. Even if there is no contract, someone may think they have appointed someone as their agent.

Companies should avoid holding themselves out as agents in their transactions. For example, suppose an employee buys something for your company after being terminated. In that case, your company may be liable for the transaction depends on how transparent you were with the employee about their departure.


Adam Grabois is an expert in all aspects of Insurance and Property with 20 years of experience. He is a licensed broker of all lines including property, casualty, life, and health. As a licensed adjuster, he is well-versed in all aspects of insurance, and he owns All Needs Insurance agency in Florida.

He attended Tufts University where he earned his undergraduate degree, followed by a Master's degree from Columbia University.

Adam shares his breadth of experience by helping many businesses and individuals manage risk and protect themselves financially. He now shares this with the audience of the "Pro Insurance Info" website.

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