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Legal Ease by Scott Sinder Before the Fall

Regulators spent the summer confusing the issues as well as brokers.

By  Scott Sinder and John Fielding

Fall. Thoughts of falling leaves, football games and, of course, the NAIC’s fall national meeting. But before we move on to the new season in the endless state regulatory cycle, let’s look at summer activity in three states that will directly affect Council members: Nevada’s non-resident countersignature requirements, California’s broker engagement letters, and Iowa’s rebating.

Nevada countersignatures. The Nevada countersignature law was the last remaining vestige of the old-line state countersignature requirements after federal court decisions in Florida, Puerto Rico, South Dakota and the U.S. Virgin Islands. When the decision striking down the Nevada countersignature requirement became final in July, the state asked the court to revise its final judgment. Nevada believed the judgment, as originally written, unnecessarily negated the entirety of the state’s producer policy signature requirements. On Aug. 15, the District Court issued an order granting the motion and clarifying the earlier ruling so that the signature requirement survives but only to the extent that it does not discriminate against non-resident producers. A licensed non-resident producer is not required to obtain a resident producer’s signature.

There has been confusion since the ruling as to whether Nevada requires producers to be appointed to sign a policy. There has been no change to the law’s appointment requirements (we double checked with the state attorney general). Thus, if a producer was required to be appointed for the placement of a policy before the decision, it is still required. If an appointment was not required, it still isn’t. In other words, for admitted products in Nevada, an appointed and licensed agent must sign the policy. For non-admitted products, a licensed broker may sign the policy to satisfy this (anachronistic) requirement.

California broker engagement letters. The California Legislature has passed a bill to clarify when a producer may be deemed to be acting as a broker. A broker may charge fees in addition to or in lieu of commissions. Agents in California generally may not charge for their property-casualty book. The legislation was awaiting Gov. Arnold Schwarzenegger’s signature as of deadline.

The bill presumes an intermediary is acting as a broker if he has an agreement in place equivalent to an engagement letter. It must include:

· A statement that the producer is transacting insurance on behalf of the consumer;

· A description of the basic services the producer will perform as a broker;

· Total broker fees; and

· If applicable, a disclosure that the producer may receive compensation from the insurer.

The bill also sets forth several specific situations where the producer is not presumed to have the latitude of a broker. This may be where the carrier has appointed the licensee as its agent (and filed a notice of appointment with the insurance department) or where the insurer has a written agreement that gives the producer binding authority, authorizes him to appoint other licensees as agents of the carrier, or confers the authority to pay claims on behalf of the insurer. The producer also may not collect additional fees if the “totality of circumstances” establishes that he is acting on behalf of the insurer rather than the client.

Iowa rebating. Nearly every state prohibits producers from cutting premiums or providing free services or another “valuable consideration” as an inducement to purchase insurance, unless the “rebate” is specified in the policy. Anti-rebating laws are nearly identical across the country and are based on language in the National Association of Insurance Commissioners’ Model Unfair Trade Practices Act.

The model language does not define a rebate. Many states regulate this on a case-by-case basis (in response to complaints from other agents). So producers are left to wonder if they can provide value-added services, discounts and marketing materials to their clients.

The Iowa Insurance Division is attempting to identify rebating under the state’s anti-rebating laws. Bulletin 08-13, issued in August, recognizes that some value-added services, including risk management services, can be offered without running afoul of the law. The division limits services to those “appropriate in scope, related to the type of insurance product involved and not excessive.” The bulletin reiterates the prohibition against “offering anything of value as inducement to purchase, change or renew an insurance policy…”

The bulletin is not perfect. But The Council supports Commissioner Susan Voss’ efforts to address the confusion. Following on the statutory clarifications adopted by New Hampshire a few years ago, and interest expressed by New York Superintendent Eric Dinallo, the Iowa activity could point to growing interest in reforming this archaic regulatory constraint.

Sinder, a partner at Steptoe & Johnson, is CIAB General Counsel.

Fielding is of counsel at Steptoe & Johnson.

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