Navigating the Fee Maze

Today’s insurance regulatory landscape can be a tricky one, particularly when it comes to charging fees. For property/casualty insurance brokers and agents, understanding permissible fee structures is crucial to maintaining compliance and avoiding penalties. With state laws varying widely and evolving regularly, even a minor oversight can have significant consequences.

The Regulatory Landscape

Each state independently regulates the circumstances under which a producer can charge a customer a separate fee for procuring an insurance policy. Often, this fee is in addition to the commission paid by the insurer, though in some cases, it may replace commission-based compensation.

Some states prohibit any fees not explicitly included in the insurer’s rate filing or policy, while others permit fees with specific limitations – such as restricting them to brokers (not agents), allowing them only for certain policy types (e.g., commercial lines), or capping the fee amount. Additionally, states that permit fees typically require producers to adhere to strict written disclosure or agreement standards.

Broker vs. Agent

In states like California, the rules differ significantly between brokers and agents.

Brokers, who represent the insured, may charge a reasonable broker fee but must meet statutory bonding and licensing requirements. By contrast, appointed agents in California are prohibited from charging any fees not included in the insurer’s rate filing. Similarly, New York allows licensed brokers to charge reasonable fees for policy placement, while agents are restricted to insurer-filed fees. Texas, however, permits agents – whether appointed or not – to charge fees, subject to certain conditions.

Fee Limitations

Several states impose specific limits on fee amounts. In New Jersey, agents may charge no more than $20 per policy year, with some exceptions. Connecticut caps fees based on policy type, such as a $35 limit for private passenger auto policies. In Arkansas, the total of fees plus commission cannot exceed 20% of the gross policy premium. Louisiana imposes caps on personal lines, including a $25 fee limit for standard homeowners and auto insurance policies.

Commercial vs. Personal Lines

Fee allowances depend on the type of policy in some states.

Iowa, for instance, permits fees for commercial lines but not for personal lines.

Pennsylvania is similar, prohibiting fees for personal lines but allowing them for commercial lines, except that no fee can be charged for commercial applications.

Kentucky and Maine restrict fees to commercial lines when the client meets minimum asset, revenue, or premium size requirements, among other conditions.

Disclosure & Agreement

Transparency is paramount in states that permit fees. Brokers and agents must ensure clear, written disclosure of any fees in line with state-specific requirements.

For example, in California, personal lines fee agreements must include a signed, insurance department-approved broker fee agreement that outlines all fees, including endorsement and payment processing fees, for the policy term.

Texas mandates specific disclosure language explaining commission calculations, while Indiana requires a pre-approved DOI disclosure form stating the fee amount, calculation basis, and confirmation of commission from the insurer. Indiana also prohibits fee variation among customers.

Best Practices for Compliance

Given the complexity and variability of state regulations, brokers and agents must have a thorough understanding of the legal frameworks governing fees. To minimize compliance risks, they’d be wise to:

• Maintain transparent, detailed fee agreements with insureds, ensuring fees are itemized separately from premiums.
• Adhere to statutory and regulatory caps on fees where they exist.
• Consult with legal counsel when entering new jurisdictions or developing fee structures to ensure state-specific compliance.
• Invest in regular training and updates on regulatory changes to keep current with evolving laws.