STATUTORY DUTIES OF INSURANCE PRODUCERS
3.1 Regulation by Insurance Department and other governmental bodies.
Insurance production agencies have a wide range of legal requirements imposed by governmental bodies, principally the Department of Insurance. Some of these are traditional regulations aimed at the proper functioning of the production agency, such as those dealing with trust funds. Others have other political objectives, such as the application of state antitrust laws to insurance by Proposition 103.
Insurance department penalties can be drastic. Trust account problems can lead to a cancellation of a broker-agent's licenses, issuance of temporary licenses, and regular audit and reporting requirements. Serious violations can lead to permanent loss of licenses. Ins. Code 1737-1748.
The purpose of this outline is to highlight some of the principal duties that are peculiar to insurance agent-brokers and which have the potential for creating problems with the Department of Insurance or other governmental bodies. With the advent of an elected Insurance Commissioner sensitive to political considerations, new potential problems have arisen.
3.2 Trust accounts.
Insurance producers have a duty to keep funds belonging to clients or carriers in separate trust accounts. Insurance Code Sections 1733-1736. Failure to do so is a major reason for insurance department accusations against agents, which can result in suspension or even termination of insurance licenses.
An agent or broker may retain the interest on trust accounts if they have the written consent of the owner of the funds (the insured or the carrier) to do so. Since trust account interest is usually a significant source of income for insurance producers, such consent should be obtained. 10 Calif. Code of Regulations 2190.6.
3.3 Record retention.
The records that a production agency must maintain are set forth in Ins. Code 1727-1727.5, and Title 10, California Code of Regulations 2190-2190.8. These records must be retained from 18 months to 5 years, depending on the type of record.
When a person who owns his expirations leaves a production agency through which he has been placing insurance, copies of the records of insurance placed should be retained by both parties, although the non-owner cannot lawfully use the records to solicit business.
3.4 Unfair practices and antitrust violations.
The McCarran-Ferguson Act provides that federal antitrust laws do not apply to the insurance industry, except in cases of 'boycott, coercion or intimidation', so long as the state regulates insurance. 15 U.S.C.A. 1011-1015. The federal law may be enforced by suits by private individuals, and carry treble damages and attorneys fees for the successful plaintiff. 15 U.S.C.A 1.
The application of California's antitrust and unfair practices laws to the insurance industry is still being developed.
California enacted its unfair practices act (Ins. Code. Section 790 ff) to regulate insurance as required by federal law. It outlaws acts of 'boycott, coercion or intimidation' as does the federal law. Ins. Code. 790.03©. For producers, it is aimed primarily against false statements. It can be enforced by the Department of Insurance, but it does not give rise to private enforcement actions.
In addition, Section 790.03(h) forbids a practice of certain unfair claims settlement practices. The Dept. of Insurance has promulgated regulations on claims settlement practices. Calif. Code of Regulations Title 10, Chapter 5, beginning with Section 2695.1. Among other things, these regulations require an agent to transmit a claim immediately to the insurer. Section 2695.5(b).
Proposition 103 applies the state's antitrust laws and similar statutes to the property and casualty insurance business. Insurance Code 1861.03. The Cartwright Act recently was held by one court to be applicable to the life insurance business, and to be enforceable by private individuals. Manufacturers Life Insurance Company (Weil Insurance Agency, Inc.) v. Superior Court (1994) ___ Cal.App.4th ___, ___ Cal.Rptr. ___. The Court of Appeals is now reconsidering its opinion. An earlier Calif. Supreme Court case seems to state otherwise. Chicago Title Ins. Co. v. Great Western Financial Corp. (1968) 69 Cal.3d, 305, 322, 70 Cal.Rptr. 849. Weil also held, however, that the other California unfair practices acts can not be enforced by private actions, but only by the State.
Business & Professions Code 16720 has been held to be similar in scope to the federal Sherman Act. It forbids combinations of two or more persons to create or carry out restrictions in trade or commerce. This includes such offenses as price fixing, tying the sale of one product or service to the sale of another, or allocating clients between them. Because insurance has historically involved rate filings, and involves cooperation to prepare statistical data or standard forms, this aspect of Proposition 103 has caused concern in the insurance industry.
Business & Professions Code 17000-17045 is somewhat similar to the federal Robinson Patman act. It specifically applies to services. It outlaws locality discrimination, sales under cost with intent to destroy competition, loss leaders, and secret rebates that do not extend to all similarly situated.
Discrimination because of marital status, sex, race, religion, national origin, are expressly forbidden. Ins. Code 679.71.
It is difficult to give general advice in this area. If an agent uses good sense and common morals, he can normally avoid antitrust type violations. If the agent is a victim of forbidden acts, on the other hand, he may be able to bring a private suit, and at a minimum may complain to the Department of Insurance.
3.5 Placing insurance.
California licenses insurance producers, and a person can 'transact' insurance only if licensed. Ins. Code 1621-1624, 1627. The term 'transact' is defined as including 'solicitation, negotiations preliminary to execution, execution of a contract of insurance, or transaction of matters subsequent to execution of the contract and arising out of it.' Ins. Code 35. This broad definition has posed problems in use of non-licensed people such as bank employees to assist in placing insurance. Some non-commissioned positions are expressly exempted from licensing requirements. Ins. Code 1634.
An 'agent' is defined as a person who a person who transacts insurance on behalf of an insurer Ins. Code 31-32, 1625-1626. A 'broker' transacts on behalf of the insured, Ins. Code 33, except for transmitting premiums or policies for the insurer Ins Code 1732. A distinction is drawn between life agents, who transact life and disability insurance (Ins. Code 32), and other broker- agents who transact other lines. a 'solicitor' is licensed to assist an agent/broker in lines other than life. Ins. Code 34. There are technically no life brokers, though some life producers represent more than one carrier.
Insurance with a non-admitted carrier can only be placed in California through a surplus line broker or special lines surplus line broker licensed in California. Ins. Code 1760-1761, except for insurance on one's own property and reinsurance.
3.6 Other regulations.
There are numerous other provisions in the Insurance Code applying to insurance production agencies. These include required notices that have to be given when placing or canceling policies. My experience is that producers manage these regulations without undue problems. Historically, the biggest problems producers have faced with the Department of Insurance involved their trust accounts. It remains to be seen whether more consumer oriented elected commissioners will expand the Department's activities into the antitrust and unfair practices area.
CHECKLIST ON ADMINISTRATIVE MATTERS
- Are there accounting procedures in place to insure that the trust account balances?
- Do you have agreements with your carriers (and clients if necessary) allowing you to retain the interest on your trust account?
- Have you checked your records retention requirements to be sure you keep required records for the requisite time?
- Is non-admitted coverage only placed through surplus line brokers when required? Do your clients understand they are being placed with non-admitted carriers, and why this is?