Will AB 1297 End the Agent/Broker Definition Debate’

The ability to collect a broker fee is often all that stands between a brokerage remaining in business and the community losing another independent outlet for insurance coverage.

For many years, there has been considerable debate over when an insurance producer is acting in the capacity of an agent and when he/she is acting as a broker. The California Department of Insurance (CDI) has itself been unable to provide a clear definition of the difference. The Insurance Code is somewhat vague on what constitutes a broker or agent, Section 1704 states “… fire and casualty agents shall not act as an agent of the insurer unless the insurer has filed with the commissioner a notice of appointment …” While this addresses when a producer is not an agent, it does not does not address the often murky relationship between an individual producer and a particular insurer, and under what circumstances the producer is acting as an agent or as a broker.

In addition to the above referenced code section, we have two other sections on which to base a definition of “agent” and “broker.” Section 1621 states “an insurance agent is a person authorized by and on behalf of an insurer to transact all classes of insurance, except life insurance.” Following that, Section 1623 states “an insurance broker is a person who, for compensation and on behalf of another person, transacts insurance, other than life insurance with, but not on behalf of, an insurer.” Other code sections establish that a producer may act as either a broker or as an agent, thus making the determination of the status of the producer something the CDI will determine on a “case by case” basis.

The root of the issue is how to determine in which circumstances a producer can charge a broker fee. A number of years ago, the American Agents Alliance worked with the CDI and other interested parties to develop a standard broker fee agreement and disclosure form. The purpose of these documents was to create a clear understanding between the producer and insurance consumer as to exactly what fees apart from premium could be charged and obtain a mutual agreement as to the payment of these fees. The mandatory use of the agreement and disclosure was incorporated into a set of broker fee regulations that took effect in Nov. 23, 2000.

Scrutiny of the issue was ratcheted up in December 2002 when the San Francisco Superior Court ruled in favor of the plaintiff in the Krumme vs. Mercury case. The plaintiff successfully argued that the existence of binding authority, use of company forms, the similarity between Mercury Insurance’s broker and agent contracts, and the general control allegedly exerted by the company over its producers constituted an agent relationship, and Mercury Insurance should have treated these producers as agents and not brokers.

Recently, an Alliance member was served with papers informing him that he is being sued in Los Angeles Superior Court over allegedly charging illegal broker fees. The suit claims that, because our member “instantly binds insurance coverage; has access to insurers’ underwriting and rating manuals and in other respects is an insurance ‘agent,’ incapable of charging broker fees.” In fact, our member does not have blanket binding authority, and binds through ZapApp, as are most independent producers.

Looking at what we believed to be the beginning of a cottage industry suing insurance producers who collect broker fees, the Alliance sponsored legislation in 2003 which sought to create a clearer definition of “broker” and “agent” in order to better clarify these capacities, particularly when the a broker fee could or could not be charged.

That bill, AB 1297 (Frommer, D-Los Angeles), cleared the Assembly Insurance committee with a unanimous vote, and passed the full Assembly by the same vote margin. The bill was held over in the Senate Insurance committee after it was decided that further work was needed in order to present a proposal that sufficiently protected a broker’s ability to charge a fee for services rendered, while addressing issues raised during negotiations.

In these days of declining commissions and additional operational responsibilities being heaped on producers, the ability to collect a broker fee is often all that stands between a brokerage remaining in business and the community losing another independent outlet for insurance coverage. The American Agents Alliance was founded nearly four decades ago on the premise that the small independent insurance producer needed a strong advocacy association looking out for his or her interests. It is in that spirit that we carry our push of AB 1297 into a second legislative session.

The debate over “broker” versus “agent” is a contentious one, with different entities expressing concerns over in which circumstances, if ever, a producer can charge broker fees. What the Alliance hopes to accomplish with AB 1297 is the creation of a clear understanding of when a producer is acting as an “agent” and when he/she is acting as a “broker.” Producers across California deserve to know if they are complying with the law and when they can legally charge a broker fee for services rendered.

Don Lukenbill has been the communications director for the American Agents Alliance since 1995. Contributing to this article were American
Agents Alliance Executive Director Lorelle Kitzmiller, Edward Levy, Esq. of Edward Levy Government Relations, and Alan Frederick, Esq. of the Law Offices of Marrone, Robinson, Frederick and Foster.

Topics Agencies Legislation