SECTIONS 1216-1216.6 - California Statutes

INSURANCE CODE

SECTION 1216-1216.6

1216. This article may be cited as the Business Transacted with
Producer Controlled Insurer Act.

1216.1. As used in this article, the following terms have the
following meanings:
(a) "Accredited state" means a state in which the insurance
department or regulatory agency having jurisdiction over the business
of insurance has qualified as meeting the minimum financial
regulatory standards promulgated and established from time to time by
the National Association of Insurance Commissioners' (NAIC)
Financial Regulation Standards and Accreditation Program.
(b) "Control" or "controlled" has the meaning ascribed in Section
1215.
(c) "Controlled insurer" means an admitted insurer which is
controlled, directly or indirectly, by a producer.
(d) "Controlling producer" means a producer who, directly or
indirectly, controls an insurer.
(e) "Admitted insurer" or "insurer" means any person, firm,
association, or corporation admitted to transact any property or
casualty insurance business in this state. The following are not to
be construed to be insurers for the purposes of this article:
(1) All risk retention groups as defined in the Superfund
Amendments Reauthorization Act of 1986 (P.L. 99-499), the Risk
Retention Act (15 U.S.C. Sec. 3901 et seq.), and the California Risk
Retention Act of 1990 (Chapter 1.5 (commencing with Section 125) of
Part 1 of Division 1).
(2) All residual market pools and joint underwriting authorities
or associations.
(3) All captive insurers. For the purposes of this article,
captive insurers are either insurance companies which are owned by
another organization and whose exclusive purpose is to insure risks
of the parent organization and affiliated companies, or in the case
of groups and associations, insurance organizations which are owned
by the insureds and whose exclusive purpose is to insure risks of
member organizations and group or association members and their
affiliates.
(f) "Producer" means a fire and casualty licensee or licensees or
any other person, firm, association, or corporation, when, for any
compensation, commission, or other thing of value, the person, firm,
association, or corporation acts or aids in any manner in soliciting,
negotiating or procuring the making of any insurance contract on
behalf of an insured other than the person, firm, association, or
corporation.

1216.2. This article shall apply to insurers as defined in
subdivision (e) of Section 1216.1, either domiciled in this state or
domiciled in a state that is not an accredited state which has in
effect a substantially similar law. All provisions of Article 4.7
(commencing with Section 1215) of Chapter 2 of Part 2 of Division 1,
to the extent that this article does not confer greater authority
upon the commissioner or impose more restrictive requirements upon
any person, shall continue to apply to all parties within insurance
holding company systems which are subject both to Article 4.7 and to
this article.

1216.3. (a) (1) The provisions of this section shall apply if, in
any calendar year, the aggregate amount of gross written premium of
business placed with a controlled insurer by a controlling producer
is equal to or greater than 5 percent of the admitted assets of the
controlled insurer, as reported in the controlled insurers' quarterly
statement filed as of September 30 of the prior year.
(2) Notwithstanding paragraph (1) of subdivision (a), the
provisions of this section shall not apply if:
(A) The controlling producer both (i) places insurance only with
the controlled insurer, or only with the controlled insurer and a
member or members of the controlled insurer's holding company system,
or the controlled insurer's parent, affiliate, or subsidiary and
receives no compensation based upon the amount of premiums written in
connection with that insurance; and (ii) accepts insurance
placements only from nonaffiliated subproducers, and not directly
from insureds.
(B) The controlled insurer, except for insurance business written
through a residual market facility such as the California Automobile
Assigned Risk Plan, accepts insurance business only from a
controlling producer, a producer controlled by the controlled
insurer, or a producer that is a subsidiary of the controlled
insurer.
(b) A controlled insurer shall not accept business from a
controlling producer and a controlling producer shall not place
business with a controlled insurer unless there is a written contract
between the controlling producer and the insurer specifying the
responsibilities of each party, and the contract has been approved by
the board of directors of the insurer and contains the following
minimum provisions:
(1) The controlled insurer may terminate the contract for cause
upon written notice to the controlling producer. The controlled
insurer shall suspend the authority of the controlling producer to
write business during the pendency of any dispute regarding the cause
for the termination.
(2) The controlling producer shall render accounts to the
controlled insurer detailing all material transactions, including
information necessary to support all commissions, charges, and other
fees received by, or owing to, the controlling producer.
(3) The controlling producer shall remit all funds due under the
terms of the contract to the controlled insurer on at least a monthly
basis. The due date shall be fixed so that premiums or installments
of premiums collected shall be remitted no later than 90 days after
the effective date of any policy placed with the controlled insurer
under this contract.
(4) All funds collected for the controlled insurer's account shall
be held by the controlling producer in a fiduciary capacity, in one
or more appropriately identified bank accounts in banks that are
members of the Federal Reserve System, in accordance with the
provisions of the insurance law as applicable. However, funds of a
controlling producer not required to be licensed in this state shall
be maintained in compliance with the requirements of the controlling
producer's domiciliary jurisdiction.
(5) The controlling producer shall maintain separately
identifiable records of business written for the controlled insurer.
(6) The contract shall not be assigned in whole or in part by the
controlling producer.
(7) The controlled insurer shall provide the controlling producer
with its underwriting standards, rules and procedures, manuals
setting forth the rates to be charged, and the conditions for the
acceptance or rejection of risks. The controlling producer shall
adhere to the standards, rules, procedures, rates, and conditions.
The standards, rules, procedures, rates, and conditions shall be the
same as those applicable to comparable business placed with the
controlled insurer by a producer other than the controlling producer.
(8) The rates and terms of the controlling producer's commissions,
charges or other fees, and the purposes for those charges or fees.
The rates of the commissions, charges, and other fees shall be no
greater than those applicable to comparable business placed with the
controlled insurer by producers other than controlling producers. For
purposes of this paragraph and paragraph (7), examples of
"comparable business" includes the same lines of insurance, same
kinds of insurance, same kinds of risks, similar policy limits, and
similar quality of business.
(9) If the contract provides that the controlling producer, on
insurance business placed with the insurer, is to be compensated
contingent upon the insurer's profits on that business, then this
compensation shall not be determined and paid until at least five
years after the premiums on liability insurance are earned and at
least one year after the premiums are earned on any other insurance.
In no event shall the commissions be paid until the adequacy of the
controlled insurer's reserves on remaining claims has been
independently verified pursuant to paragraph (1) of subdivision (d).
(10) A limit on the controlling producer's writings in relation to
the controlled insurer's surplus and total writings. The insurer may
establish a different limit for each line or subline of business.
The controlled insurer shall notify the controlling producer when the
applicable limit is approached and shall not accept business from
the controlling producer if the limit is reached. The controlling
producer shall not place business with the controlled insurer if it
has been notified by the controlled insurer that the limit has been
reached.
(11) The controlling producer may negotiate but shall not bind
reinsurance on behalf of the controlled insurer on business the
controlling producer places with the controlled insurer, except that
the controlling producer may bind facultative reinsurance contracts
pursuant to obligatory facultative agreements if the contract with
the controlled insurer contains underwriting guidelines including,
for both reinsurance assumed and ceded, a list of reinsurers with
which those automatic agreements are in effect, the coverages and
amounts or percentages that may be reinsured and commission
schedules.
(c) Every controlled insurer shall have an audit committee of the
board of directors composed of independent directors. The audit
committee shall annually meet with management, the insurer's
independent certified public accountants, and an independent casualty
actuary, or other independent loss reserve specialist acceptable to
the commissioner, to review the adequacy of the insurer's loss
reserves.
(d) (1) In addition to any other required loss reserve
certification, the controlled insurer shall annually, on April 1 of
each year, file with the commissioner an opinion of an independent
casualty actuary, or other independent loss reserve specialist,
acceptable to the commissioner, reporting loss ratios for each line
of business written and attesting to the adequacy of loss reserves
established for losses incurred and outstanding as of yearend,
including incurred but not reported losses, on business placed by the
producer.
(2) The controlled insurer shall annually report to the
commissioner the amount of commissions paid to the producer, the
percentage the amount represents of the net premiums written and
comparable amounts and percentages paid to noncontrolling producers
for placements of the same kinds of insurance.

1216.4. The controlling producer shall, prior to the effective date
of the policy, deliver written notice to the prospective insured
disclosing the relationship between the producer and the controlled
insurer; except that, if the business is placed through a subproducer
who is not a controlling producer, the controlling producer shall
retain in its records a signed commitment from the subproducer that
the subproducer is aware of the relationship between the insurer and
the producer and that the subproducer has or will notify the insured
of the relationship between the controlling producer and the
controlled insurer.

1216.5. (a) (1) If the commissioner believes that the controlling
producer or any other person has not materially complied with this
article, or any regulation or order issued or promulgated pursuant to
this article, and after notice and an opportunity to be heard, the
commissioner may order the controlling producer to cease placing
business with the controlled insurer.
(2) If the commissioner finds that because of any material
noncompliance that the controlled insurer or any policyholder thereof
has suffered any loss or damage, the commissioner may bring a civil
action or intervene in an action brought by or on behalf of the
insurer or policyholder for recovery of compensatory damages for the
benefit of the insurer or policyholder or other appropriate relief.
(3) Nothing in paragraph (1) shall be construed to limit any
authority granted to the commissioner by any other provision of law
to issue orders or take actions prior to the holding of a hearing.
(b) If an order for liquidation or rehabilitation of the
controlled insurer has been entered pursuant to Article 14
(commencing with Section 1010) of Chapter 1 of Part 2 of Division 1,
and the receiver appointed under that order believes that the
controlling producer or any other person has not materially complied
with this article, or any regulation or order issued or promulgated
pursuant to this article, and the insurer suffered any loss or damage
therefrom, the receiver may maintain a civil action for recovery of
damages or other appropriate sanctions for the benefit of the
insurer.
(c) Nothing contained in this section shall affect the right of
the commissioner to impose any other penalties authorized by any
other provision of law.
(d) Nothing contained in this section is intended to or shall in
any manner limit or diminish the rights of policyholders, claimants,
creditors, or other third parties.

1216.6. Controlled insurers and controlling producers who are not
in compliance with Section 1216.3 of this act on its effective date
shall have 60 days to do so and shall comply with Section 1216.4
beginning with all policies written or renewed on or after March 1,
1993.