Insurance Law

Regulation of Insurance Intermediaries – New Appleman on Insurance Law Library Edition, Chapter 15

   By Randall Doctor and Robert J. Cerny

This chapter explores the law relating to the government regulation of insurance intermediaries.   Insurance intermediaries are individuals or entities that in various capacities represent and act on behalf of parties to insurance transactions. In the United States, the vast majority of insurance transactions are conducted through insurance intermediaries of one kind or another. As the insurance industry impacts nearly every individual and entity in society, the law affects insurance with a public interest. Consequently, the insurance industry, insurance intermediaries included, is subject to extensive government regulation. Section 15.01 of this chapter briefly reviews the development of government regulation of insurance in the United States. Historically, insurance intermediaries are regulated by the individual states. The United States Supreme Court has held that the federal government has the power to regulate the business of insurance pursuant to the Commerce Clause of the U.S. Constitution. Nonetheless, Congress preserved state preeminence in this area by enacting the McCarran-Ferguson Act in 1945, under which no act of Congress shall preempt or supersede state insurance law unless the act expressly governs the business of insurance. The authority of the states to regulate the business of insurance arises from the general police power for the purpose of protecting the health, safety and welfare of the public. Based on this power, all of the states have enacted legislation that regulates, to varying degrees, the capacity and activities of insurance intermediaries.   This regulation is extensive, governing aspects of the insurance intermediary’s business including the granting, suspension and revocation of licenses, contractual relationship with the client, sales activities, compensation, record-keeping, prohibitions and penalties.
Section 15.02 reviews the numerous categories of insurance intermediaries, each of which typically requires a specific license to conduct its activities. While all intermediaries are agents for some party to an insurance transaction, an insurance “agent” as that term is used for regulatory purposes, denotes a person or entity that acts on behalf of an insurer. By contrast, an insurance broker is defined as one who transacts insurance with, but not on behalf of, an insurer. An insurance solicitor is authorized to perform transact insurance on behalf of an insurer or policyholder, but must do so under the supervision of a licensed insurance agent or broker. A managing general agent is a specialized insurance agent with the authority to perform operational tasks on the insurer’s behalf, such as marketing, underwriting and claims handling. Third party administrators likewise assume operational tasks on behalf of insurers or other parties, often in the areas of claims or benefit administration. Reinsurance intermediaries are specialized insurance brokers that represent parties to reinsurance transactions. Finally, in recent years, some states have established special or limited categories of insurance intermediaries authorized to transact particular insurance transactions, such as private passenger automobile insurance, travel insurance, rental car coverage and credit insurance, among others.
Section 15.03 discusses the implantation of state insurance laws by state insurance commissioners. To address problems that arise inevitably from the patchwork of rules resulting from individual state regulation, state commissioners established the National Association of Insurance Commissioners (“NAIC”) to promote coordination and to address national insurance issues. While actions of the NAIC are not binding, the NAIC develops and adopts model laws and regulations that state legislatures may enact in whole or in part. For example, the Producer Licensing Model Act sets forth fundamental licensing provisions for insurance agent, brokers and solicitors. The NAIC has also adopted a Managing General Agent Model Act containing relevant definitions, requiring a written agreement with the insurer, and specifying provisions that must be contained therein. The Title Insurance Agent Model Act addresses particular issues that arise in that line of business, such as restrictions on inappropriate payments to market participants in exchange for referral business. Finally, the Reinsurance Intermediary Model Act contains licensing and other provisions tailored to the representation of parties to reinsurance transactions.
As described in Section 15.04, state insurance regulators have promoted cooperation and reciprocity to enable insurance intermediaries to operate more easily and efficiently in multiple jurisdictions. The principal example of such cooperation is in the area of agent and broker licensing. In that regard, insurance intermediaries are able to obtain authority in numerous states by establishing a resident license and subsequently applying for nonresident status in additional jurisdictions through an abbreviated process. States also cooperate with respect to continuing education requirements and disciplinary actions, among other things.
While states dominate the regulation of insurance intermediaries, in recent years there have been several efforts resulting in express, though limited, federal jurisdiction. These federal statutes are reviewed in Section 15.05. The most prominent federal act to do so is the Gramm-Leach-Bliley Act, which requires specified insurance intermediaries to establish internal procedures to protect private customer information and to disclose those policies to consumers. In addition to the Gramm-Leach-Bliley Act, Congress has asserted jurisdiction over insurance intermediaries in the area of telemarketing, “junk fax” restrictions, and anti-spamming. In addition, proposals have been made, but not yet enacted, to establish federal insurance intermediary licenses and charters, a national insurance information database, and standardized consumer protection rules, all of which would affect the business of insurance intermediaries.   Proposals have also been made to assert federal jurisdiction over surplus and excess lines insurance and reinsurance intermediaries.
Randall A. Doctor is a partner in the San Francisco office of Barger & Wolen, LLP. He has a nationwide practice in insurance regulatory and insurance compliance matters with an emphasis in these involving the California Department of Insurance. Mr. Doctor has focused exclusively on insurance for the past 22 years and is a leading expert in many areas of insurance law. He represents more than 100 insurers and insurance-related entities (insurance agencies and brokers, administrators, viatical/life settlement companies and motor clubs) before all state insurance departments on matters including entity formation, licensing, mergers, acquisitions, reinsurance transactions, product development and policy form filings. He regularly advises entities with respect to regulatory compliance, financial and market conduct examinations, and administrative actions. Mr. Doctor is a regular speaker at many insurance industry conferences.
Robert J. Cerny is a partner in the Los Angeles office of Barger & Wolen, LLP where he has practiced in the firm’s corporate and insurance regulatory department for 15 years. Mr. Cerny concentrates on transactions in the insurance and financial sectors and insurance regulatory matters on a national basis, representing insurers, insurance intermediaries and other entities operating in all lines of business. Mr. Cerny served as chairman of the Insurance Law Committee of the California State Bar for the 2008-2009 term.