§ 58-3-165. Business transacted with producer-controlled property or casualty insurers. - North Carolina Statutes

§58‑3‑165.  Business transacted with producer‑controlledproperty or casualty insurers.

(a)        As used in thissection:

(1)        "Accreditedstate" means a state in which the insurance department or regulatoryagency has qualified as meeting the minimum financial regulatory standardspromulgated and established from time to time by the NAIC.

(2)        "Captiveinsurer" means an insurance company that is owned by another organizationand whose exclusive purpose is to insure risks of the parent organization andaffiliated companies. In the case of groups and associations, "captiveinsurer" means an insurance organization that is owned by the insureds,and whose exclusive purpose is to insure risks of member organizations or groupmembers and their affiliates.

(3)        "Control"and its cognates mean the direct or indirect possession of the power to director cause the direction of the management and policies of a person, whetherthrough the ownership of voting securities, by contract other than a commercialcontract for goods or nonmanagement services, or otherwise, unless the power isthe result of an official position with or corporate office held by the person.Control is presumed to exist if any person directly or indirectly owns,controls, holds with the power to vote, or holds proxies representing tenpercent (10%) or more of the voting securities of any other person.

(4)        "Controlledinsurer" means an insurer that is controlled, directly or indirectly, by aproducer.

(5)        "Controllingproducer" means a producer who, directly or indirectly, controls aninsurer.

(6)        "Insurer"means any person licensed to write property or casualty insurance in thisState. "Insurer" does not mean a risk retention group under Article22 of this Chapter, residual market mechanism, joint underwriting authority,nor captive insurer.

(7)        "Producer"means an insurance broker or brokers or any other person, when, for anycompensation, commission, or other thing of value, that person acts or aids inany manner in soliciting, negotiating, or procuring the making of any insurancecontract on behalf of an insured other than that person. "Producer"does not mean an exclusive agent or any independent agent acting on behalf of acontrolled insurer, including any subagent or representative of the agent, whoacts as such in the solicitation of, negotiation for, or procurement or makingof an insurance contract, if the agent is not also acting in the capacity of aninsurance broker in the transaction in question.

(b)        The Commissionermay determine, after furnishing all persons in interest notice and opportunityto be heard and making specific findings of fact to support the determination,that control exists in fact, notwithstanding the absence of a presumption tothat effect. The Commissioner may determine upon application that any persondoes not or will not upon the taking of some proposed action control anotherperson. The Commissioner may prospectively revoke or modify that determination,after notice and opportunity to be heard, whenever in the Commissioner's judgmentrevocation or modification is consistent with this section.

(c)        This sectionapplies to insurers that are either domiciled in this State or domiciled in astate that is not an accredited state having in effect a substantially similarlaw. The provisions of Article 19 of this Chapter, to the extent they are notsuperseded by this section, apply to all parties within holding company systemssubject to this section.

(d)        The provisions ofthis section apply if, in any calendar year, the aggregate amount of grosswritten premiums on business placed with a controlled insurer by a controllingproducer is equal to or greater than five percent (5%) of the admitted assetsof the controlled insurer, as reported in the controlled insurer's most recentannual statement or its quarterly statement filed as of September 30 of theprior year. The provisions of this section do not apply if:

(1)        The controllingproducer places insurance only with the controlled insurer, or only with thecontrolled insurer and a member or members of the controlled insurer's holdingcompany system, or the controlled insurer's parent, affiliate, or subsidiaryand receives no compensation based upon the amount of premiums written inconnection with that insurance; and the controlling producer accepts insuranceplacements only from nonaffiliated subproducers, and not directly frominsureds; and

(2)        The controlledinsurer, except for insurance business written through a residual marketmechanism, accepts insurance business only from a controlling producer, aproducer controlled by the controlled insurer, or a producer that is asubsidiary of the controlled insurer.

(e)        A controlledinsurer shall not accept business from a controlling producer and a controllingproducer shall not place business with a controlled insurer unless there is awritten contract between the producer and the insurer specifying theresponsibilities of each party, and unless the contract has been approved bythe board of directors of the insurer and contains all of "the followingminimum provisions:

(1)        The insurer mayterminate the contract for cause, upon written notice to the producer. Theinsurer shall suspend the producer's authority to write business during thependency of any dispute regarding the cause for the termination.

(2)        The producer shallrender accounts to the insurer detailing all material transactions, includinginformation necessary to support all commissions, charges, and other feesreceived by, or owing to, the producer.

(3)        The producer shallremit all funds due under the contract terms to the insurer on at least amonthly basis. The due date shall be fixed so that premiums or installments ofpremiums collected shall be remitted no later than 90 days after the effectivedate of any policy placed with the insurer under this contract.

(4)        The producer shallhold all funds collected for the insurer's account in a fiduciary capacity, inone or more appropriately identified bank accounts in banks that are members ofthe Federal Reserve System, in accordance with the provisions of this Chapteras applicable. Funds of a producer who is not required to be licensed in thisState shall be maintained in compliance with the requirements of the producer'sdomiciliary jurisdiction.

(5)        The producer shallmaintain separately identifiable records of business written for the insurer.

(6)        The producer shallnot assign the contract in whole or in part.

(7)        The insurer shallprovide the producer with its underwriting standards, rules and procedures, themanual setting forth the rates to be charged, and the conditions for theacceptance or rejection of risks. The 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 comparablebusiness placed with the insurer by a producer other than a controllingproducer.

(8)        The rates and termsof the producer's commissions, charges, or other fees and the purposes for thecharges or fees. The rates of the commissions, charges, and other fees shall beno greater than those applicable to comparable business placed with the insurerby producers other than controlling producers. For the purposes of thissubdivision and subdivision (7) of this subsection, "comparable business"includes the same lines of insurance, same kinds of insurance, same kinds ofrisks, similar policy limits, and similar quality of business.

(9)        If the contractprovides that the producer, on insurance business placed with the insurer, isto be compensated contingent upon the insurer's profits on that business, thenthe compensation shall not be determined and paid until at least five yearsafter the premiums on liability insurance are earned and at least one yearafter the premiums are earned on any other insurance. In no event shall thecommissions be paid until the adequacy of the insurer's reserves on remainingclaims has been independently verified under subsection (g) of this section.

(10)      A limit on theproducer's writings in relation to the insurer's surplus and total writings.The insurer may establish a different limit for each line or subline ofbusiness. The insurer shall notify the producer when the applicable limit isapproached and shall not accept business from the producer if the limit is reached.The producer shall not place business with the insurer if it has been notifiedby the insurer that the limit has been reached.

(11)      The producer maynegotiate but shall not bind reinsurance on behalf of the insurer on businessthe producer places with the insurer; however, the producer may bindfacultative reinsurance contracts under obligatory facultative agreements ifthe producer's contract with the insurer contains underwriting guidelinesincluding, for both reinsurance assumed and ceded, a list of reinsurers withwhich the automatic agreements are in effect, the coverages and amounts orpercentages that may be reinsured, and commission schedules.

(f)         Every controlledinsurer shall have an audit committee, consisting of independent directors, ofthe insurer's board of directors. The audit committee shall meet annually withthe insurer's management, the insurer's independent certified publicaccountants, and an independent casualty actuary or another independent lossreserve specialist acceptable to the Commissioner, to review the adequacy ofthe insurer's loss reserves.

(g)        In addition to anyother required loss reserve certification, the controlled insurer shall, on orbefore April 1 of each year, file with the Commissioner an opinion of anindependent casualty actuary or of another independent loss reserve specialistacceptable to the Commissioner, reporting loss ratios for each kind ofinsurance written and attesting to the adequacy of loss reserves establishedfor losses incurred and outstanding and for incurred but not reported losses asof the end of the prior calendar year on business placed by the producer.

(h)        The controlledinsurer shall report annually to the Commissioner the amount of commissionspaid to the controlling producer, the percentage that amount represents of thenet premiums written, and comparable amounts and percentages paid tononcontrolling producers for placements of the same kinds of insurance.

(i)         The controllingproducer, before the effective date of any policy, shall deliver written noticeto the prospective insured disclosing the relationship between the producer andthe controlled insurer: However, if the business is placed through asubproducer who is not a controlling producer, the controlling producer shallretain in the controlling producer's records a signed commitment from thesubproducer that the subproducer is aware of the relationship between theinsurer and the producer and that the subproducer has or will notify theprospective insured.

(j)         If theCommissioner believes that a controlling producer or any other person has notmaterially complied with this section or with any rule adopted or order issuedunder this section, after notice and opportunity to be heard, the Commissionermay order the controlling producer to stop placing business with the controlledinsurer. If it is found that, because of the material noncompliance, thecontrolled insurer or any policyholder of the controlled insurer has sufferedany loss or damage, the Commissioner may maintain a civil action or intervenein an action brought by or on behalf of the insurer or policyholder forrecovery of compensatory damages for the benefit of the insurer or policyholderor other appropriate relief.

(k)        If an order forliquidation or rehabilitation of the controlled insurer has been entered underArticle 30 of this Chapter, and the receiver appointed under that orderbelieves that the controlling producer or any other person has not materiallycomplied with this section or any rule adopted or order issued under thissection, and the insurer suffered any loss or damage therefrom, the receivermay maintain a civil action for recovery of damages or other appropriatesanctions for the benefit of the insurer.

(l)         In addition to anyother remedies provided in this section, whenever the Commissioner believesthat a person has not materially complied with this section, the Commissionermay institute a proceeding under G.S. 58‑2‑60 or under G.S. 58‑2‑70.In addition to the civil penalty or restitution proceedings provided for inG.S. 58‑2‑70, the Commissioner may issue a cease and desist orderagainst the person.

(m)       This section doesnot affect the Commissioner's right to impose any other penalties provided forin this Chapter nor the rights of policyholders, claimants, creditors, or otherthird parties.

(n)        Controlled insurersand controlling producers who are not in compliance with subsection (e) of thissection on October 1, 1991, have until December 1, 1991, to come intocompliance and shall comply with subsection (i) of this section beginning withall policies written or renewed on or after December 1, 1991. (1991, c. 681, s. 28; c. 720,s. 92.)