Rules for disclosure of compensation arrangements involving surplus lines brokers are ill-defined, according to an industry trade group representative.

That description of the regulatory situation was provided by Steve Stephan, director of government relations for the National Association of Professional Surplus Lines Offices, Ltd. during a webinar last week sponsored by FC&S Online.

Mr. Stephan also said proposed court action over the new disclosure rule in New York could set the course for other states.

Currently there is no standardized answer on producer compensation disclosure for surplus lines producers throughout the United States. In fact, what needs to be disclosed and what surplus lines producers can be paid for, or collect fees for, can differ significantly from state to state, Mr. Stephan said.

The webinar, titled "How Much Is Enough: The Fallout from Producer Compensation," reviewed the history of compensation disclosure going back to the 2004 investigations by the New York attorney general and New York Insurance Department, which revealed that retail brokers were paid hidden fees to steer clients to insurers involved in a bid-rigging scheme.

It also dealt with the compensation disclosure regulations for agents and brokers that the New York Department of Insurance introduced Feb. 10 for implementation in January 2011. The Independent Insurance Agents & Brokers of New York have said they will contest it in court.

Michael Byrne, a partner in the law firm Dewey & LeBoeuf, reviewing the history of the compensation controversy to its present day, noted that there is no uniform case law on producer compensation or uniformity over what disclosures should be made or the duty of producers to the clients on this issue throughout the United States.

Concerning New York's new regulation, Mr. Byrne said the initial disclosures did not appear to be that difficult to provide for commercial lines, but the same might not be said for personal and life lines.

Overall, he recommended that if a producer is in doubt about disclosing, they should make the disclosure, keeping in mind "what a reasonable purchaser might expect" and what an "aggressive prosecutor" with "higher ambitions" would look to exploit to make an example of the industry.

He said in a number of states both courts and regulators are examining the compensation question, but he felt that no signification action would be taken until after the New York litigation with IIABNY is resolved.

Discussing surplus lines producers, Mr. Stephan said that overall, in many cases where there is no specific mention of surplus lines, the rules nominally apply only to retail producers. This is principally because surplus lines rate filings are not regulated, he observed.

Some states restrict fees or have outright bans on the collection of fees by surplus lines producers, but it is difficult to chart what states do and do not allow this because of the unique application of regulations over compensation to surplus lines in each state, he explained.

While some states allow the collection of certain fees and others ban them, other states are vague with contradictory language on the issue. In some cases, Mr. Stephan noted, the intent of laws and regulations are so vague that it is difficult for the courts to understand the intent.

Most states require some disclosure, he said, but not all lay out the specifics for customer acknowledgement of receiving the information or recordkeeping.

California, he said, has tried to fix the vagueness of its laws regarding the definition of what a broker and agent are and what their duties are.

In New York, Mr. Stephan noted, the Excess Lines Association of New York has placed an education video online to help producers navigate the regulations.

FC&S is a publication of National Underwriter Co., part of the Summit Business Media.

Special Reports /

Many States Vague On Surplus Lines Compensation Rules

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