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FAQ: Disclosing and Charging Broker Fees in California
Article originally appeared in the California Insurance Wholesalers Association (CIWA) Newsletter.
The California Department of Insurance (CDI) regularly receives a high volume of customer complaints concerning excessive broker fees or the failure to disclose such fees. The CDI intensively scrutinizes the imposition and disclosure of broker fees, and thus producers doing business in California must ensure full compliance with California law. Fortunately, the rules governing the conduct of producers acting as brokers are quite clear; if you use the appropriate forms, obtain the customer’s prior consent, and practice complete transparency, you will, in all likelihood, remain in compliance with California law.
Below are the answers to several frequently asked questions that commonly arise regarding broker fees in California:
Q: When can a producer charge a broker fee?
A: When contemplating whether to charge a broker fee, first determine whether you are acting as a broker or an agent. Only a producer acting in the capacity of a broker can charge broker fees. If a producer is acting as an agent for the insurer, the producer cannot charge any fees related to the procurement of insurance that are not part of the insurer’s rate filing and authorized by the insurer. In California, there is a presumption that a producer is acting as a broker if the person: (i) is licensed as a broker-agent, (ii) maintains a $10,000 broker’s bond, and (iii) discloses in a written agreement signed by the customer all of the following: (a) that he/she is transacting insurance on behalf of the customer; (b) a description of the basic services that will be provided to the customer; (c) the amount of the broker fee that will be charged; and (d) that he/she may receive compensation, directly or indirectly, from an insurer resulting from the customer’s purchase of insurance. (California Insurance Code § 1623(a))
The presumption of acting as a broker will be rebutted and the producer will be deemed an agent if the insurer has filed a Notice of Appointment with the CDI or the producer has written authority to bind coverage, appoint agents or handle claims. (California Insurance Code § 1623(c))
Q: Are there specific requirements for charging a broker fee for commercial lines?
A: A broker fee charged with the transaction of a commercial policy must be agreed upon in advance. In light of the presumption established by Section 1623, it is important that a commercial broker fee agreement be used. The broker fee agreement should clearly disclose the fee and be signed by the customer and broker. Full upfront disclosure and transparency will mitigate confusion and decrease the likelihood of regulatory or civil action. The broker should never: combine the broker fee and premium into a down payment; simply mention the broker fee and the premium in a quote or proposal; or merely include a statement such as “the premium includes fees.” Again, the broker fee must be separately disclosed and agreed to with the customer, and evidenced by a written broker fee agreement signed by the customer.
Q: What are the rules with respect to personal lines?
If you seek to charge a broker fee for the transaction of personal lines (personal automobile or homeowners), you must use the Standard Broker Fee Agreement or a custom agreement containing language that does not conflict with the Standard Broker Fee Agreement. You must also use the Standard Broker Fee Disclosure Form and provide the insured with a copy of the Automobile pamphlet or Homeowners pamphlet found on the CDI’s website. (California Code of Regulations § 2189.1 et seq. “Broker Fee Regulations”) I recommend reviewing the Broker Fee Regulations on the CDI’s website as they contain other important conditions and requirements for charging a broker fee for personal lines business.
Q: What are the most common customer complaints to the CDI with regard to broker fees charged for personal lines insurance?
A: There are several, including:
- The customer did not agree to the fee in advance
- The broker failed to disclose to the customer that a fee may be charged at the time of initial premium quote
- The broker failed to provide the customer with a broker fee agreement and Broker Fee Disclosure Form printed in English and any language principally used to advertise, solicit or negotiate the sale and purchase of the insurance
- The broker failed to provide the customer with a copy of the fully completed and signed broker fee documents
- The broker failed to refund the broker fee if he or she acted incompetently resulting in a financial loss to the customer
- The broker failed to refund the broker fee if his or her conduct resulted in an uprate in premium
- The broker failed to refund the broker fee if an unlicensed producer transacted the insurance policy
- The broker failed to place the customer with an insurer for which the broker is an appointed agent solely for the purpose of charging a broker fee
- The broker charges or attempts to charge a broker fee for a renewal, endorsement or other service that was not disclosed in the broker fee agreement
Q: Does each individual producer have to have a broker’s bond? Or is it sufficient to have the agency bonded?
A: The broker’s bond only needs to be issued to and filed by the brokerage with the CDI, not the individual producers endorsed onto the brokerage’s business entity license.
Q: What are the requirements for disclosing a wholesaler fee that a retail broker passes through to the client?
The wholesaler is required to disclose its broker fee to the retail broker and the retail broker is required to disclose the wholesaler’s broker fee to the insured. Pursuant to Insurance Code Section 1623 (b), a wholesaler is deemed to have satisfied the disclosure requirement of Section 1623, if it provides written disclosure to the retail broker of the criteria set for in subsection (a) (2), (3), and (4): A description of the basic services that will be performed by the wholesaler, the amount of the wholesaler’s broker fee, and whether you will receive commission from the insurer. It is incumbent on the retail broker to notify the insured about the wholesaler’s broker fee since the retailer has the contact with the customer.
Q: What are the fee disclosure rules for surplus lines brokers?
A: In general, a surplus lines broker can charge a fee to the insured, so long as it is fully disclosed and accepted by the insured prior to placement (Insurance Bulletin 997) and disclosed in accordance with Section 1623(b).
Q: Is there a broker fee template that I can access?
A: For personal lines insurance, you can access helpful forms from the CA DOI website. For commercial lines insurance, you should consult an insurance regulatory attorney.
Q: What if we are charging a “risk management” fee on commercial lines?
A: If you charge a risk management fee for a commercial policy, the fee and services provided should be conspicuously disclosed in writing to the insured before it is charged.
Full and transparent disclosure of broker fees in accordance with the above-referenced statutes and regulations will reduce the likelihood of confusion to your customer and help to avoid regulatory scrutiny. An experienced attorney, with a complete understanding of the state-by-state regulations regarding broker fees, can help you stay focused on what matters most – your business.
This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.