Disclosing Broker Fees to Ensure Full Compliance
An area of intensive scrutiny by the California Department of Insurance surrounds the charging and disclosing of broker fees. The department regularly receives a high volume of customer complaints concerning the failure to disclose broker fees or excessive broker fees.
Fortunately for brokers, complying with department regulations in this regard is easy: The producer acting as a broker must simply use the appropriate forms, obtain the customer’s prior consent to the broker fee and be transparent in the fee disclosure.
In California, only brokers 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. (California Insurance Code § 1861.05.)
Broker vs. Agent
When contemplating whether to charge a broker fee, first determine whether you are acting as a broker or an agent. An agent transacts insurance on behalf of the insurer, while a broker transacts insurance on behalf of the insured (California Insurance Code § 1621.). It will be presumed that a person 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 department or the producer has written authority to bind coverage, appoint agents or handle claims. (California Insurance Code § 1623(c).)
If you’ve determined you’re acting as a broker according to this analysis, you can charge a reasonable negotiated broker fee to the customer for procurement of property/casualty insurance. If you’re acting as an agent of the insurer, you cannot charge a broker fee or any other fee not contained in the insurer’s rate filing.
Broker Fee Agreement (Commercial Lines)
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’s 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 clearly disclosed in a written broker fee agreement.
Broker Fee Agreement (Personal Lines)
If you seek to charge a broker fee for the transaction of personal lines (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 department’s website. (California Code of Regulations § 2189.1 et seq.) I recommend reviewing the Broker Fee Regulations on the department’s website.
Beside the complaint that the customer did not agree to the fee in advance, the department routinely alleges in customer complaints that the broker failed to:
- Disclose to the customer that a fee may be charged at the time of initial premium quote;
- Provide the customer with a broker fee agreement and Broker Fee Disclosure Form printed in English and in any language principally used to advertise, solicit or negotiate the sale and purchase of the insurance;
- Provide the customer with a copy of the fully completed and signed broker fee documents;
- Refund the broker fee if he or she acted incompetently, resulting in a financial loss to the customer;
- Refund the broker fee if his or her conduct resulted in an uprate in premium;
- Refund the broker fee if an unlicensed person transacted the insurance policy;
- Place the customer with an insurer for which the broker is an appointed agent, solely for the purpose of charging a broker fee.
It’s also often alleged that brokers charge or attempt to charge a broker fee for a renewal, endorsement or other service not disclosed in the broker fee agreement.
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.