California Broker Regulations Redux

On Oct. 18, 2004, the California Insurance Commissioner issued proposed regulations regarding the duties insurance salespeople owe consumers and requiring certain disclosures by those salespeople. The regulations stated the existence of a fiduciary duty and required disclosures of compensation earned as a result of placing insurance for consumers. At the public hearing and in written comments, the regulations were strongly criticized. Criticisms were made on the grounds that the regulations purported to create a fiduciary duty that did not otherwise exist, because they were not clearly worded, because they deviated from procedures authorized by the Unfair Practices Act and because of various impracticalities that would arise with their implementation.

On April 12, 2005, the Commissioner announced revisions to the broker regulations originally proposed on Oct. 18, 2004.

Under California law, the regulations must be adopted within one year from the date of the notice of the proposed regulations. Therefore, once the revised regulations have passed the public comment period scheduled for May 2, 2005, it is possible that the Commissioner will move directly to adopt the regulations. Alternatively, the Commissioner could revise the regulations again and once again submit those revised regulations to the public for comment. If the regulations are not adopted by Oct. 18, 2005, then the Commissioner will have to re-commence the process with a new notice of proposed regulations.

As revised, the regulations now state that they apply to all “lines of insurance and all producers.” All the definitions in the original regulations have been deleted, and definitions of “client” and “producer” have been added. A producer is defined as someone who is acting as an insurance agent, life agent, insurance broker, insurance solicitor or a bail bond agent as defined by the California Insurance Code. A client is “a person with whom the producer transacts insurance.”

The disclosure section is significantly re-worked, while the fiduciary duty section is abandoned in favor of a section making the regulations severable.

Under the revised regulation, a misrepresentation or unfair act occurs if the producer does not advise a client–in advance of signing an agreement–whether the producer will seek a quote from one or more than one insurers. If a producer obtains a quote from more than one insurer and “makes a recommendation regarding the quotes,” then the producer has committed a misrepresentation or unfair act if the producer does not advise the client prior to or at the time of the recommendation (1) whether the producer is acting on behalf of the insurer or client; and (2) about any compensation the broker will receive from the recommended insurer. A producer who accepts a fee from a client is “conclusively deemed” to be acting for the client. If the producer cannot provide the amount of compensation, the producer may disclose the methodology by which its compensation will ultimately be calculated.

A producer acting for and compensated by a client must obtain the client’s consent before accepting any compensation from any other party that derives in whole or in part from a transaction on behalf of that client. Violation of this rule constitutes an “unfair act” under the code.

If a producer advises it will seek a quote from more than one insurer, for each quote obtained, it must disclose the name of the insurer, the quoted premium and the amount the producer stands to gain if the insurance is purchased. Violation of this rule constitutes an “unfair act” under the code. The section notes that it is not intended to limit any other duties that may exist to disclose “material facts.”

The revised regulations will still draw objections based upon lack of clarity, problems with implementation and procedural irregularities. While most brokers are not fundamentally opposed to the idea of providing greater disclosures to their customers, they do want any regulatory requirements to be easy to understand and to implement. This concern is based not only on a desire to have achievable compliance goals, but also because of the fear that failure to comply with regulations could also expose the broker to civil liability.

Even as the regulations are pending, brokers are confronted with the issue of what disclosure(s) to make to consumers and how to respond to requests from existing consumers about compensation the broker earned on already-existing policies. Many brokers have already revised their disclosure practices in anticipation of the adoption of the regulations.