United States (California)
LOCKE LORDCarey Barney and Lilian Khanjian
[email protected]; [email protected]
1. Insurance intermediation activities
1.1 Is the distribution of insurance products (hereinafter referred to as
‘insurance intermediation activities’ or ‘insurance intermediation’) reserved to insurance intermediaries in your country?
Yes, although insurers can also distribute products directly without the use of any intermediary.
1.2 What does the term ‘insurance intermediation’ include? Is there any
definition set forth by statutory or case law? In any case, please indicate which activities/services are included in the above definition, for example, presentation or proposal of insurance products, assistance or consultancy aimed at drafting the agreement? Are collaboration activities that relate to the administration or execution of the contracts drafted, even in the case of accidents, included in the definition? Does the drafting of contracts or insurance agreements in collective form on behalf of insured individuals also form part of insurance intermediation activities?
The California Insurance Code considers anyone involved in the ‘transaction’ of insurance contracts as subject to licensure as an insurance intermediary. The Code defines ‘transact’ in this context as including the solicitation of an insurance contract, negotiations preliminary to execution of an insurance contract, the execution of an insurance contract and the transaction of matters subsequent to the execution of the contract and arising out of it. Thus, this definition would encompass the presentation or proposal of insurance products, assistance or consultancy aimed at the drafting of an insurance contract for presentation to an insurer and administrative activities associated with the contracts executed or drafted.
1.3 Are insurance intermediation activities allowed as ancillary activities to other professional activities (eg, travel or rent-a-car services, etc) and to what extent? Furthermore, are there exceptions that allow actors, other than insurance intermediaries, to carry out insurance intermediation
activities? Is it a matter related, for example, to the risk covered, the duration or the cost of the policy premium, etc?
In general, California has adopted the view that all persons involved in the transaction of contracts of insurance must be licensed as insurance intermediaries. However, for certain industries and lines of business, the licensing requirements are streamlined, in recognition that the procurement of insurance is an activity ancillary to the licensee’s principal business. Examples would be cargo shipping agents, limited lines travel insurance agents, credit insurance agents, title insurance representatives, rental car agents, self-service storage agents and portable electronics insurance agents.
2. Insurance intermediaries’ requirements
2.1 In order to act as an insurance intermediary, is there need for an
authorisation and/or to be enrolled in a register? If yes, what are the requirements to be authorised/enrolled in the register as an insurance intermediary (individual or legal entities, integrity and/or professional requirements, etc)? Briefly explain how it works.
All persons transacting contracts of insurance with respect to persons, property or risks located in California must obtain a licence from the California Department of Insurance. The principal categories of insurance intermediary licensees in California are property broker-agents, casualty broker-agents and life agents. For each of these license authorisations, individuals residing in California must be at least 18 years of age, complete at least 20 hours of approved pre-licensing study, take at least 12 hours of study on ethics and the California Insurance Code, submit to fingerprinting and background investigation, and pass a written examination administered by the Department of Insurance.
Non-resident intermediaries transacting insurance with respect to California risks must also be licensed in California, but need not take a pre-licensing course of study or pass a qualifying examination if they hold the same kind of licence in their home state.
Business entities engaging in the transaction of insurance contracts in California must also obtain organisational licenses from the California Department of Insurance, based on the appropriate licensure of all individuals transacting business on behalf of the entity in California. Such organisational licensees need not, in general, maintain a physical presence in the State of California.
2.2 In what form can anyone access and verify the registration/authorisation or
verify the fact that the insurance intermediary is a professional (eg, via the web)?
The California Department of Insurance maintains an online register of all individual and organisational licensees. This database is accessible to the public.
2.3 Are insurance intermediaries with a registered office in another country allowed to operate in your country and how (eg, under the right of establishment or freedom to provide services in your country, as in the EU)? If yes, under what conditions? In such a case, are they bound by the same obligations as the insurance intermediaries with a registered office in your country? Please describe.
California provides no reciprocity for licensees operating in other states or countries. If such persons are transacting insurance with respect to California risks, they must obtain a non-resident licence in California.
3. Different types of insurance intermediaries
3.1 Please list the different types of insurance intermediaries acting in your country such as agents, brokers, banks, financial intermediaries or financial advisers.
See 2.1.
3.2 Do insurance intermediaries need to enter into a written contract with the
insurers (or receive a mandate from the insurers)?
In general, insurance intermediaries need not have written contracts with the insurers, but current US industry practice is to enter into written contracts.
3.3 Can an insurance intermediary enter into a contract with the insurers (or receive a mandate from the insurer) and in turn enter into one or more agreements with other insurance intermediaries (the so-called horizontal distribution)?
It is not uncommon, particularly with respect to commercial insurance placements, for there to be multiple levels of intermediaries, for example, a retail intermediary that deals directly with the insured, one or more wholesale intermediaries, and, for placements with international insurance markets, an intermediary in the country where the insurer is located. Such intermediaries can enter into a contract with the insurer, although the more
common practice is to have their contract with the intermediary ‘up the chain’ of distribution. It would be more common, for example, for a retail producer to have a contract with a wholesale producer rather than with the insurer directly.
3.4 The insurance intermediaries more in detail:
3.4.1 The agent
3.4.1.1 Does the role of insurance agent exist in your country? If yes, describe the agent’s functions.
For life and health insurance business, including annuities, all intermediaries licensed in California are considered to be acting as insurance agents (ie, representatives of the insurer) rather than insurance brokers (representatives of the insured). As such, all acts life and health insurance agents are imputed to the principal, the insurer. They perform all the normal insurance intermediary functions and can be appointed to represent multiple unaffiliated insurers. The insurer pays their remuneration in the form of a commission, typically computed as a percentage of the premium paid.
For property and casualty insurance business, intermediaries are licensed in California as ‘broker-agents’, meaning that depending on the totality of the facts and circumstances, the intermediary can be deemed to be acting as either an agent (representative of the insurer) or a broker (representative of the insured) with respect to a given transaction. However, by statute, certain factors, if present, can create an irrefutable presumption that the intermediary is acting as an agent of a particular insurer. These factors include the following: (i) the licensee is appointed by the insurer (which entails a written registration filed with the California Department of Insurance) as its agent for the particular class or type of insurance being transacted; or (ii) the licensee has a written agreement with the insurer that authorises the licensee to bind business on behalf of the insurer without obtaining the insurer’s prior written notice of acceptance of the risk; or (iii) the licensee is authorised, pursuant to a written agreement with the insurer, to appoint other licensees as agents of the insurer; or (iv) the licensee is authorised, pursuant to a written agreement with the insurer, to pay claims on behalf of the insurer.
3.4.1.2 In particular, does an agent act on behalf of the insurer or the insured? Who pays the agent’s remuneration? To what kind of remuneration is the agent entitled?
3.4.1.3 If he acts on behalf of the insurer, describe the type of work relationship with the insurer (eg, subordinate, para-subordinate or freelance, self-employed etc). Does the ‘principal-agent model’ exist, that is, is one appointed by the insurer to manage a particular branch or subsidiary?
In the US, insurers transact business with both exclusive agents and non-exclusive agents. Exclusive agents transact business only on behalf of the insurer and its affiliates, whereas non-exclusive agents are authorised to represent multiple unaffiliated insurers and act essentially as independent freelance producers.
3.4.1.4 What type of organisation does the agent have? Can he have staff working
for him (eg, sub-agents)?
An agent can act either as an individual producer, or be part of a licensed agency that comprises multiple individual employed licensees and staff. It is not uncommon for larger organisations to have contractual relationships with sub-agents, who produce business and place that business through the upstream agency.
3.4.1.5 Is the relationship between the insurer and the agent regulated by a collective bargaining agreement? If yes, what does it mainly cover? Can the relationship be exclusive to a particular area? Is the remuneration established by the collective bargaining agreement? Can the provisions be waived by the parties’ mutual agreement?
Typically in the US, relationships between an insurer and agent are not regulated by collective bargaining agreements. While it is true that many large insurers offer their intermediaries standard contracts with standard terms, conditions and commission rates, some insurers are prepared to negotiate bespoke agreements with certain intermediaries, particularly where the intermediary controls a large volume of business. Alternatively, in these instances the insurer may continue to use its standard contract form but waive or modify certain provisions, such as commission rates, service levels, etc.
3.4.1.6 Does the termination of the work relationship between the agent and
insurer provide for the agent’s obligation to return the portfolio of contracts? In such a case, would the agent be entitled to an indemnity?
Under the so-called American Agency System that prevails throughout the US, an agent’s clients are typically considered to be an asset that belongs to the agent rather than the insurer. So long as the agent is in compliance with its financial obligations to the insurer at the time the work relationship with the insurer terminates, the agent is deemed to be the rightful owner of its
‘expirations’, or list of clients, and the insurer does not have the right to solicit these clients directly or sell this list to other intermediaries. The agent is free to bargain away this right in its contract with the insurer, but such instances are relatively rare in the US, except in the case of insurers that do business through captive or exclusive agents.
3.4.2 The broker
3.4.2.1 Please describe the broker’s services. In general terms, do the services consist of intermediation or are they similar to consultancy/advisory activities? Is the broker an independent actor?
In California, intermediaries licensed as agent-brokers who are acting in the role of a broker rather than an agent in a given transaction perform in general the same kinds of intermediary activities as an agent, except that in doing so they are acting as the representative of the insured rather than the insurer. Thus, in theory at least, they should be advocating the interest of the insured, seeking the broadest coverage at the lowest premium rate for their client. In large commercial insurance transactions, the intermediary acting as a broker may also be involved in negotiating policy language and terms. At all times a broker should be acting as an independent adviser and consultant for the insured.
California law presumes that a person is acting as an insurance broker with respect to property and casualty lines of insurance if the person is licensed as an agent-broker, maintains a surety bond in the amount of $10,000, and discloses in a written agreement signed by the insurance consumer all of the following: (i) that the person is transacting insurance on behalf of the consumer; (ii) a description of the basic services the person will perform as a broker; (iii) the amount of all broker fees being charged by the person; and (iv) if applicable, the fact that the person may be entitled to receive compensation from the insurer, directly or indirectly, for the consumer’s purchase of insurance as a consequence of the transaction.
Note, however, the factors that, if present, will rebut the presumption of broker status, as summarised in 3.4.1.1. In all other cases, the presumption of broker status may be rebutted based on the totality of the circumstances indicating that the broker-agent is acting on behalf of the insurer rather than the insured.
3.4.2.2 Who pays for the broker’s remuneration (please specify case by case for the
different services, if any)? Is the broker allowed to retrocede a portion of his remuneration to the insurer or to the insured?
Brokers are typically compensated by way of a commission payable by the insurer. They may also receive separate compensation from the insured – usually styled as a broker fee – if agreed to in writing by the insured.
3.4.3 Banks, financial intermediaries, financial advisers and others allowed to act
as insurance intermediaries
3.4.3.1 Can banks, financial intermediaries and/or financial advisers act as
insurance intermediaries?
Banks, financial intermediaries and/or financial advisers can act as insurance intermediaries in California if they are appropriately licensed with the California Department of Insurance to transact the applicable lines of business, as described above in 2.1 and 3.4.1.1.
3.4.3.2 Please define a financial intermediary. Are there particular requisites for the profession of financial intermediary? Does the financial intermediary have to be enrolled in another register (eg, a register of financial intermediaries)?
‘Financial intermediary’ means an institution, firm, organisation or individual who performs intermediation between two or more parties in a financial context, such as connecting sources of funds with users of funds. A financial intermediary is typically an entity that facilitates the channelling of funds between lenders, investors, foundations or other entities that have money and are interested in connecting with businesses or communities where their money can be deployed. Financial intermediaries include, but are not limited to, banks, financial development corporations, economic developers, microbusiness lenders and community development organisations.
Section 15(a) of the Securities Exchange Act of 1934 (the ‘Exchange Act’) requires financial intermediaries acting as broker-dealers engaged in interstate commerce to register with the Securities and Exchange Commission (SEC).
3.4.3.3 Please define a financial adviser. Are there particular requisites for the profession of financial adviser? Does the financial adviser have to be enrolled in another register (eg, a register of financial advisers)?
‘Broker’ is defined in section 3(a)(4) of the Exchange Act as anyone engaged in the business of effecting transactions in securities on behalf of others. The SEC has traditionally interpreted the definition of ‘broker’ very broadly to reach persons who participate in important parts of a securities transaction, including solicitation, negotiation and execution of the transaction. The presence of transaction-based compensation has often led to a presumption that the recipient must register as a broker-dealer.
The SEC requires an investment adviser to register with the SEC if it has assets under management of at least $100m or the investment adviser provides investment advice to an investment company registered under the Investment Company Act of 1940 (SEC Rule 203A-1). If the investment adviser has between $25m and $100m of assets under management and must register with 15 or more states, the investment adviser must register with the SEC. If an investment adviser is eligible for an exemption as found under Dodd-Frank, it may also register with the SEC. If the investment adviser does not meet the SEC’s statutory criteria, the investment adviser must be registered or licensed by a state, unless otherwise exempt.
Generally speaking, the SEC regulates investment adviser firms with more than $100m in assets under management (and certain other investment adviser firms that meet other statutory criteria). The states regulate investment adviser firms with less than $100m in assets under management and fee-only financial planners.
3.4.3.4 Can financial intermediaries and/or financial advisers distribute any
insurance and/or financial products? If yes, under what conditions or with what limitations?
Yes. The Gramm-Leach-Bliley Act (the ‘GLBA’) was enacted on 12 November 1999. The GLBA allowed banks, brokerages and insurance companies to merge. Specifically, the GLBA permits ‘financial holding companies’ to own insurance companies, banks and securities firms. A financial holding company (FHC) is a statutorily defined variation of a bank holding company (BHC). In order to qualify as an FHC, the entity must be well-capitalised, well-managed and have a satisfactory level of compliance with the Community Reinvestment Act (the ‘CRA’).
FHCs are permitted to conduct a much more extensive line of services than traditionally provided by BHCs. Permitted financial activities include insuring, guaranteeing or indemnifying against loss, harm, damage, illness disability or death, or providing and issuing annuities, and acting as principal, agent, or broker for the purposes of the foregoing, in any state.
In order to form and operate such financial subsidiaries, the bank must be well-capitalised, well-managed and have a satisfactory CRA compliance rating. GLBA-compliant financial subsidiaries are authorised to engage in the same activities as BHC subsidiaries as well as BHCs outside of the US.
The stated purpose of the GLBA was to permit insurance companies, banks and other traditional financial institutions to affiliate with each other. The GLBA provides that issuers of insurance and insurance agents must comply with licensing requirements of all states in which they issue or sell insurance. The Federal Reserve Board (FRB), however, regulates the parent holding company. The GLBA authorises the FRB to approve affiliations between insurers and depository institutions and preempts state law that ‘presents or restricts’ these affiliations.
The National Banking Act
Although the creation of the FHC structure under the GLBA enables banks to affiliate with insurance companies, the limitations regarding direct issuance of insurance by banks under the National Banking Act remain. One exception to this rule is 12 US Code Section 92, which permits national banks to sell insurance in sparsely populated areas. Moreover, banks have been granted certain insurance authority pursuant to the Comptroller of the Currency’s interpretation of the ‘incidental powers’ clause of 12 U.S.C.S. section 24. A national bank located and doing business in any place with a population of less than 5,000 persons could act as an agent for fire, life, or other insurance companies by soliciting and selling insurance, even if that insurance was not related to any extension of credit or other customer relationship of the bank.
California regulation of insurance activities of banks chartered in California
California has generally remained with the majority of states by not providing its state-chartered banks with specifically enumerated insurance authority. Therefore, the regulation of the insurance activities of California-chartered banks has principally remained a matter of federal rather than state law. In fact, until the passage of Proposition 103 in 1989, California maintained specific restrictions on the insurance marketing and underwriting activities of California chartered banks over and above those provided under federal law. In particular, section 1643 of the former Insurance Code generally prohibited banks, BHCs and their subsidiaries, affiliates, officers and employees from being licensed as or acting in the capacity of insurance agents and brokers. Effective from 1 January 1989, Proposition 103 repealed section 1643 of the Insurance Code, thereby removing the prohibition against banks selling insurance. While California-chartered banks now enjoy the ability to market insurance as agents or brokers, that ability remains subject to the limitations existing with respect to the activities of bank holding companies and their state bank subsidiaries under the federal Bank Holding Company Act.
As with national banks, federally chartered savings and loan associations and their holding companies are generally prohibited from directly transacting insurance business. This prohibition, however, is subject to certain limitations. Savings and loan holding companies may own subsidiaries (other than a savings and loan association) that conduct insurance agency business.
There are other practical limits upon the ability of savings and loan associations to invest in an insurance-related service corporation. The Financial Institutions Act provides that savings and loan associations are required to demonstrate that they meet minimum capital requirements on a consolidated accounting basis that includes any majority-owned subsidiaries and a prorated portion of the assets of any company in which the savings and loan association has an ownership interest of five per cent or more. Savings and loan associations cannot engage in insurance activities through their service corporations until the Office of Thrift Supervision has determined by regulation or order that the activity is reasonably related to the operation of a federal savings and loan association. The Office of Thrift Supervision’s regulations provide that service corporations may properly act as insurance brokers or agents for liability, casualty, automobile, life, health, accident or title insurance, but not private mortgage insurance. Other activities are subject to approval by the Office of Thrift Supervision upon application.
California regulation
Pursuant to the Financial Institutions Act, the regulation of both federally and state chartered savings and loan associations has become primarily a federal matter, since the insurance system backing deposits in those institutions is a creation of the federal government. Nevertheless, California has several laws that affect the ability of California savings and loan associations to engage in insurance activities.
California chartered savings and loan associations are prohibited from acting in an insurance underwriting or marketing capacity. As under federal law, California chartered savings and loan associations may participate in the ownership of savings and loan service corporations and be part of a holding company system that owns an insurance agency. California savings and loan associations may not invest more than ten per cent of their total assets in service corporations and investments may only be made in service corporations that engage in activities ‘reasonably related’ to the savings and loan activities of the association. No specific bulletins or other guidelines exist with respect to the approval of insurance-specific service corporations.
California restriction on sale of insurance in connection with purchases and loans
Recognising the potential for abuse when a bank either directly or indirectly offers insurance in conjunction with sales or loans, section 770 of the Insurance Code contains restrictions on such offers. Section 770 specifically prohibits ‘tie-in sales’, stating in pertinent part that:
‘No person engaged in the business of financing the purchase of real or personal property or of lending money on the security of real or personal property shall require, as a condition precedent to financing the purchase of such property or to loaning money upon the security thereof, or as a condition prerequisite for the renewal or extension of any such loan or for the performance of any other act in connection therewith, that the person for whom such purchase is to be financed or to whom the money is to be loaned or for whom such extension, renewal or other act is to be granted or performed, negotiate any insurance or renewal thereof covering such property through a particular insurance agent or broker.’
Section 770.1 of the Insurance Code amplifies this theme by providing that no person making a loan secured by real property may make available to any person (that is, to any insurance agent) information contained in a fire and casualty insurance policy for the purpose of soliciting other types of insurance coverage if the borrower has filed a statement with the lender indicating that this information may not be used or made available for that purpose. Thus, section 770.1 limits the ability of institutional lenders to operate as a referral service through arrangements with insurance agents and brokers.
3.4.3.5 With reference to insurance intermediaries other than agents, brokers, banks, financial intermediaries and financial advisers, as indicated under question 2.1 above (if any), please describe what kind of products they can distribute and under what conditions.
See 3.4.3.4 above.
4. Rules of conduct and responsibilities
4.1 Are there rules of conduct that insurance intermediaries should comply with
(eg, duties in relation to the obligation of utmost care, correctness, utmost good faith, information, adequacy, transparency, conflict of interests, filing of documentation, separate accounting or other accounting obligations)? Please describe the above duties, specifying if they apply to all types of insurance intermediary (eg, agents, brokers, banks, financial intermediaries, financial advisers, etc) and whether the content differs – with particular reference to responsibility – according to the type of actor/activity and person (insurer or insured) receiving the activity.
An insurance agent is a person who transacts insurance on behalf of an admitted insurance company. An agent’s duties and responsibilities vary according to the nature of the function he or she is employed to perform. The agent’s primary obligation is to represent the insurance insurer in the transaction of insurance with the general public. In fulfilling this duty, the agent is required to follow instructions relating to the agency relationship, keep the insurer informed of material facts, account for or transmit all funds received to the insurer, act in the insurer’s interests, protect the insurer’s interests and exercise reasonable diligence in the discharge of his or her duties. It is customary for an agent to execute an agency contract with the insurer. Generally, the agency contract contains such information as the nature of the agent’s authority, limitations on authority, type and amount of compensation and provisions for termination by either party.
While the function of an insurance agent is to transact business on behalf of the insurer, an insurance broker transacts insurance on behalf of another person, usually the insured, and not on behalf of the insurer. An insurance agent represents an insurer under an employment by it. A broker is, in essence, employed in each instance as a special agent for a single purpose. While the very definition of agent indicates an ongoing and continuous relationship, brokers and the insured are ordinarily involved in a series of discrete transactions, while agents and the insured tend to be under some duty to each other during the entire length of the relationship.
A broker’s primary duty is towards the customer. An insurance broker is generally the agent for the insured, but a broker may become an agent for the insurer for the purpose of delivering policies and collecting premiums on the policies. In some circumstances, the broker also has obligations under tort law toward the insurer.
The most definitive characteristic of the difference between agents and brokers is the fact that an agent has authority to bind the insurer, but a broker does not. Typically, an insurer must first execute the binder on a policy, and the broker may not execute a policy without prior authorisation from the insurer. Unlike an agent, a broker does not act for the insurer and the insurer is not liable for the broker’s acts or omissions. Another difference lies in their relationships with the customer and the insurer: a broker’s duty and obligation are to the customer, while an agent’s first allegiance is to the insurance company.
An agent is tied to his or her insurance company, while a broker, with no binding authority, is an ‘independent middleman’ not associated with a particular insurer. Insurance agents are agents of the insurer and brokers normally are not. Therefore, the insurer usually may not be held liable in the
event of a broker’s error, and the bond requirement for a broker is necessary to protect the insured.
A broker lacks authority to bind on behalf of the insurer. A broker must submit an application for coverage to the insurer and the latter must accept the application before the risk is placed. An agent, on the other hand, has authority to bind without further contact with the insurer.
Beyond giving the agent authority to transact insurance, the Insurance Code does not deal extensively with the authority of an insurance agent. The general rule is that an agent’s powers are governed by the laws of agency. Regardless of well-defined limitations on an agent’s authority, the insurer may still be bound to the agent’s representations by the doctrine of ostensible authority. Although an insurer may have knowledge of its agent’s unauthorised acts, the doctrine of estoppel may prevent the insurer from disaffirming the insuring agreement.
In some cases, an agent’s unauthorised actions may be subsequently ratified by the insurer. Ratification of an agent’s actions first requires that he or she was acting on behalf of the insurer. In addition, the principal must not only have knowledge of the agent’s unauthorised act, but must also consent to or accept the benefits of the act. Finally, the principal must engage in conduct tending to confirm the agent’s acts, or conduct that is inconsistent with a claim of disapproval. Inconclusive or ambiguous acts by the insurer may not serve as the basis for ratification.
Because the broker is acting for the insured rather than the insurer, the broker does not have authority to bind on behalf of the insurer. This lack of authority on the broker’s part requires him or her to submit the insurance business to the insurer for approval before the risk is placed.
In addition to the statutory authority, a broker, like an agent, is governed by general rules of agency, although, unlike an agent, the broker’s principal is the customer rather than the insurer. However, in many cases, an individual is licensed as a broker-agent. If so, he or she is deemed to be acting as an agent for purposes of a policy placed with the insurer with whom the notice of appointment has been filed.
Agent’s duty to insurer
An agent owes the insurer a duty to exercise reasonable care and to make a reasonable effort to produce a profit for the insurer. A professional agent is required to have the particular knowledge and to exercise the particular skill and diligence expected of it.
Liability is not incurred by a mere error of judgment in the exercise of discretion unless the error is based on want of care or diligence. The business judgment rule applies to determine an agent’s standard of care towards the insurer. An agent is not liable for every incorrect judgment that is made, but is liable for situations in which he or she can be held to have been negligent. For example, an agent is liable if the agent negligently induces an insurer to assume coverage on which the insurer suffers a loss.
An agent who receives information from an applicant has a duty to disclose any material information pertaining to the policy to the insurer; and the insurer is deemed to have knowledge of those facts.
Broker’s duty to insurer
Generally, a broker acts in the interest of the insured rather than the insurer and has no duties to the insurer. In practice, a broker may enter into an agreement with the insurer permitting the broker to place business with that insurer. Depending on the facts of the particular case, as well as the conduct of the parties and communications between them, commonly referred to as the totality of the circumstances test, a broker may nevertheless become the agent of the insurer. The longstanding rule is that the broker acts as the agent of the insured regarding the procurement of insurance, and the agent of the insurer for the purpose of collecting and remitting premiums and delivering the policy. When the broker is acting in the insurer’s interest in collecting premiums, the broker owes a fiduciary duty to the insurer. In 2008, section 1732 of the Insurance Code was amended to clarify that a broker may, on behalf of an insurer, collect and transmit premiums or return premiums and deliver policies or other documents evidencing insurance. Performance of those functions cannot be construed for any purpose to mean that the person is an insurance agent requiring an appointment from the insurer.
Agent’s and broker’s duties to the insured
California courts have not made a clear distinction between agents and brokers with respect to their duties to the insured. In some cases, the courts have even used the terms ‘brokers’ and ‘agents’ interchangeably. Nevertheless, the courts have at least uniformly explained that, ordinarily, both agents and brokers have the duty to use reasonable care, diligence and judgment in procuring the particular insurance specified by the insured. As explained in further detail below, this duty does not appear to be a fiduciary duty. Courts have suggested that, under certain circumstances, an agent or broker may take on additional duties.
In the absence of evidence supporting a third-party beneficiary theory, a broker owes duties only to the insured, not to others who might benefit from coverage procured by the broker for the insured.
Beyond the duty to use reasonable care, diligence and judgment in procuring the particular insurance specified by the insured, it cannot be said that agents and brokers have set duties. The scope of an insurance agent or broker’s duties should be determined on a case-by-case basis.
Standard of care
Ordinarily, an insurance agent assumes only those duties usually found in any agency relationship. This includes the obligation to use reasonable care, diligence and judgment in procuring the insurance specified by the insured. However, the existence of such a relationship does not automatically impose any duty on the agent to advise the insured on specific insurance matters. It is the insured’s responsibility to advise the agent of the insurance he or she wants, including the limits of the policy to be issued. A broker has no duty to investigate an insured’s coverage needs and procure the requisite coverage to meet those needs in the absence of a request by the insured.
However, an agent may assume additional duties by an express agreement or a holding out that he or she has having expertise in the insured’s insurance needs and may be liable for negligence or breach of contract for violation of those duties. Typically, the breach of duty consists of a failure to procure coverage in accordance with that requested by the insured, or a failure to advise the insured of material facts concerning the coverage provided.
When the client makes a specific request regarding coverage and the agent agrees to procure it, the agent may be held liable for failing to do so. Similarly, when an agent undertakes to prepare an insurance proposal for a client who has requested coverage, the agent may be liable for breach of contract for failing to procure coverage consistent with the terms of the proposal.
Duty of disclosure
An agent or a broker is under an affirmative duty to disclose to the customer all material facts concerning the coverage involved. In addition, sections 780 and 781 of the Insurance Code generally prohibit insurers and agents from misrepresenting policy terms.
Agents and brokers may have a duty to disclose and explain the content of policies to their clients. When an agency relationship exists, there is an obligation to use due care. In addition to permitting the customer to rescind
the insurance contract, an insurance producer may be liable for damages should he or she fail to adequately advise the client as to the contents of the policy.
Although a broker may be liable for misrepresenting the nature, scope or extent of coverage, a broker has no duty to ascertain the financial soundness of the insurer or to advise an insured of adverse changes in the insurer’s financial capability.
An insured may maintain an action against a broker for negligence based on breach of the duty to inform and advise the insured about the scope of coverage and absence of needed coverage, despite a court determination that the insurer breached its duty to defend.
Fiduciary duties
With respect to an insurance broker’s fiduciary duty to its insured, case law is both limited and unsettled. It is unclear whether a fiduciary relationship exists between an insurance broker and an insured. Other than when handling an insured’s money, a broker’s duty – whether or not phrased as a fiduciary duty – is no greater than the duty to use reasonable care and diligence in procuring insurance. With respect to an insurance broker's fiduciary duty to its insured, case law is both limited and unsettled. The court in Hydro-Mill Co. Inc. v
Hayward (2004)1 summarised the current state of the law thus: ‘it is unclear whether a fiduciary relationship exists between an insurance broker and an insured.’2 A more recent court decision put it this way: ‘other than when handling an insured's money, a broker's duty – whether or not phrased as a fiduciary duty – is no greater than the duty to use reasonable care and diligence in procuring insurance.’3 In Hydro-Mill, the court held that a professional negligence claim subsumed a breach of fiduciary duty claim, such that the shorter two-year statute of limitations for negligence barred an insured from bringing the suit against an insurance broker for failure to obtain requested insurance coverage. Despite the court's comment that a fiduciary relationship might not exist, the court maintained that a broker may have some fiduciary duties. The court referenced a case, which stated that a broker is held to a fiduciary standard where the broker holds a customer's premiums or return premiums. The court also referenced a treatise which stated that a broker's fiduciary duty might include the duty to avoid conflicts of interest, self-dealing, excessive compensation, and the like.
Funds held in a fiduciary capacity
1115 Cal. App. 4th 1145
2Id. at 1157
Because one of an insurance producer’s main functions is the direct marketing of insurance policies, policyholders’ funds pass through a producer’s hands on a daily basis. All funds received by any person acting as an insurance agent or broker as premiums are held in a fiduciary capacity. The agent or broker acts a fiduciary in this regard to both the insured and the insurer. The statutory and case law specifying that an insurance producer holds premium funds in a fiduciary capacity effectuates a public policy of protecting both insurers and policyholders from the mishandling and dissipation of insurance premiums.
4.2 Does the insurance intermediary represent the insurer? By way of example,
is the agent also the insurer’s representative vis-à-vis the customer, and if so, does this also apply during trial before a court? Is there a matter of imputation of knowledge? What happens when a broker has information on matters relevant to the insurer’s decision to insure which the broker fails to disclose to the insurer? Is the insured deemed to have breached its duty of disclosure in such circumstances? In which cases? Can the insurance intermediary be accountable for the contracts he executed on behalf of the insurer?
See 4.1.
4.3 Is the insurer jointly liable for damages caused by the insurance
intermediary, appointed by the same, when executing intermediary activities? Who is liable vis-à-vis the insured person? Is it always the intermediary or the insurer?
See 4.1.
4.4 Are there particular regulations or specific forms of compensation for damages caused to the insured person?
See 4.1.
5. Supervision and sanctions
5.1 Regardless of the requirement of an authorisation and/or enrolment, are insurance intermediaries subject to the control of supervisory bodies? Does the supervisory body have powers/duties of prudential supervision on the insurance intermediary’s activities, and if so, in what way does it act?
All insurance intermediaries transacting insurance with respect to risks located in the State of California are subject to regulation and supervision by the California Department of Insurance. This supervision encompasses not
only licensing, but also market conduct supervision of such intermediaries and enforcement actions against intermediaries that fail to comply with minimum professional standards, violate regulatory requirements, are convicted of criminal activities or engage in other fraudulent, dishonest or unethical practices.
Sanctions that may be imposed by the California Department of Insurance include suspension or revocation of the intermediary’s licence, monetary penalties, cease and desist orders and orders of restitution or disgorgement.
5.2 Are there fines for violations of the insurance intermediaries’ obligations? If yes, please describe.
As noted above, the California Department of Insurance has legal authority to impose monetary penalties or fines for violations of various statutory and regulatory requirements. The Department also has the authority to negotiate monetary penalties or forfeitures in lieu of licence revocation or suspension. Negotiated monetary penalties in lieu of licence suspension or revocation or other regulatory sanctions cannot exceed the following amounts: (i) $4,000 for any single offence; (ii) $20,000 in the aggregate for all offences involved in any one proceeding; (iii) 30 per cent of the gross commissions on insurance transacted by the licensee in the preceding calendar year; or (iv) any amount proven, or admitted, to have been received or retained by the licensee in violation of the California Insurance Code.
5.3 Do sanctions also apply to foreign intermediaries who operate in your country?
Yes.
5.4 Is there a consultation procedure with the insurance intermediary before the fine is applied?
In most cases, the licensee is afforded basic due process protections before regulatory actions are taken or fines imposed. These include notice of hearing, hearing before an independent trier of fact and written decision. Moreover, the Department’s staff attorneys are generally prepared to engage in pre-hearing settlement discussions in an effort to resolve alleged violations, thereby avoiding formal hearing or written findings of violations.
5.5 Could the application of more fines, or the breach of particular regulations,
result in the revocation of the authorisation, or in the intermediary being struck off the register (if any), or in the prohibition to act as an insurance intermediary? If yes, what are the most relevant circumstances?
Probably the most common tool available to the California Department of Insurance for violations of regulatory and Insurance Code requirements are revocation or suspension of the intermediary’s licence to transact business in California. These remedies are most commonly sought in cases of misappropriation of funds, criminal convictions, fraud and other unprofessional or unethical conduct.
