Surplus Lines Fees Q&A
If a retail broker charges a fee on business that is being placed through the facilities of a surplus lines broker:
What is the proper way to show the fees?
Personal Lines - A.R.S. § 20-465 governs the authority of insurance producers to charge fees to insureds in connection with personal lines insurance. A.R.S. § 20-465(A) authorizes producers to charge a fee for "services not customarily provided in the transaction of insurance" if the following conditions are met:
a. the fee is filed with the Department of Insurance
b. the services performed are in excess of those normally performed for insureds
c. the service charge and the specific services for which the charge is made are disclosed and agreed to in writing by the insured on a form approved by the director
d. the amount of the service charge is reasonably related to the cost of the service performed
Commercial Lines – A.R.S. § 20-465(E) now expressly exempts fees charged in connection with "commercial" lines insurance from the requirements of the fee statute. This statute defines "commercial" insurance as "insurance that insures against the risks resulting from the responsibilities or activities of one or more businesses, including motor vehicle insurance policies insuring seven or more motor vehicles." A.R.S. § 20-465(F). There is no other statute specifically imposing any requirements on an insurance producer relating to fees charged in connection with the placement of commercial insurance. As such, there do not appear to be any statutory limitations on fees charged in connection with commercial lines insurance.
Surplus Lines - A.R.S. § 20-410 governs the authority of surplus lines brokers to charge fees to insureds related to the placement of surplus lines insurance. A.R.S. § 20-410(C) authorizes a surplus lines broker to charge a fee "in addition to the premium for services provided in the transaction of surplus lines insurance if the following conditions are met before the coverage is placed:"
a. the service fee and the specific services for which the fee is being charged are disclosed to the insured or the insured's representative and are agreed to in writing by the insured or the insured's representative
b. collect the surplus lines premium tax required by A.R.S. § 20-416 are paid on any fees charged to the insured
Based on the foregoing, if the fees are being charged by a surplus lines broker, the surplus lines broker would need to disclose in writing to the insured or the insured's representative the amount of the fee and the services to be performed for which the fee is being charged in writing and obtain the agreement of the insured or the insured's representative to the fee (presumably by signing the correspondence or otherwise acknowledging the fee). There is no specific method required by law as to how to disclose the fees, other than disclosure in writing. As such, surplus lines brokers may disclose the fee by email, in a letter, on a policy declarations page or in any other written communication to the insured or the insured's representative which is reasonably calculated to bring the fee to the attention of the insured.
Because commercial insurance is expressly exempt from the requirements of A.R.S. § 20-465, there do not appear to be any specific requirements applicable to insurance producers who intend to charge fees in connection with the placement of commercial or surplus lines coverage since insurance producers are not subject to either statute. However, as a precautionary measure, we would advise that insurance producers imposing a fee in connection with a commercial insurance transaction follow the requirements of A.R.S. § 20-410, thereby providing disclosure of the amount of the fee, the services to be provided in exchange for the fee, and the insured or insured's representative agreeing to the fee in writing. Moreover, whether the fee is being charged by a retail producer or a surplus lines broker, any fee being charged in connection with surplus lines coverage is subject to applicable premium tax (of 3%) and stamping fee, which would need to be collected and remitted to the Department of Insurance.
In 2016, the Arizona State Legislature enacted HB2149 which, among other things, amended A.R.S. § 20-415 to clarify that surplus lines brokers are not responsible for reporting fees or remitting premium taxes or stamping fees due on fees charged by other insurance producers in connection with the placement of surplus lines insurance. Nonetheless, to the extent surplus lines brokers are informed about fees charged by insurance producers and are given the fees and taxes required to be remitted in connection with such fees, the broker should report the fees and remit the premium tax and stamping fee imposed. However, to the extent the surplus lines broker is not informed about a fee charged by a producer or given the stamping fee and premium taxes due, once HB2149 takes effect (90 days after the Legislature adjourns sine die) it will no longer be the responsibility of the broker to report the fee or remit the stamping fee/premium tax.
Is it necessary to charge a surplus lines tax and stamping fee on the fees being charged?
A.R.S. § 20-167 is the statute that imposes a stamping fee on surplus lines insurance transactions. A.R.S. § 20-167(I) provides that the "stamping fee" is a "reasonable filing fee" charged for any surplus lines transactions, and A.R.S. § 20-167(G) requires this stamping fee to be paid by surplus lines brokers to the Arizona Surplus Line Association, as the entity with whom the Department of Insurance has contracted to manage surplus lines transactions.
A.R.S. § 20-415(E) now clarifies that surplus lines brokers are not responsible for remitting stamping fees or premium taxes due in connection with fees charged by insurance producers for the placement of surplus lines insurance.
While A.R.S. § 20-167 imposes a stamping fee on all surplus lines transactions, this statute does not specifically impose the stamping fee on fees charged to insureds. However, the Surplus Lines Association has consistently interpreted this statute to require a stamping fee to be paid on any fees charged in connection with a surplus lines transaction, since the fee is part of the transaction subject to the stamping fee. Moreover, as noted above, HB2149, enacted this year, clarifies that surplus lines brokers are not responsible for reporting any fees or remitting either the premium tax or stamping fee due in connection with a fee charged by an insurance producer related to surplus lines transactions. Under common statutory construction rules, courts must construe statutes that are "in pari materia," or that address the same subject, together so that they are harmoniously and consistently applied as though they were one law. See Ruth Fisher Elementary School Dist. v. Buckeye Union High School Dist., 202 Ariz. 107, 110 ¶ 12, 41 P.3d 645, 648 (App. 2002). Applying this rule of statutory construction, we believe a court interpreting Arizona's Insurance Code would conclude that fees imposed by surplus lines brokers or insurance producers in connection with a surplus lines insurance transaction are subject to the stamping fee imposed by A.R.S. § 20-167, in addition to surplus lines premium tax.
Would the retail agent need permission from the Surplus Lines broker (making the filing) before a fee is charged to a client to coordinate the Surplus Lines tax?
With the enactment of HB2149, in 2016 surplus lines brokers are no longer required to report and remit fees and taxes due in connection with fees charged by insurance producers. Moreover, there does not appear to be any provision in Arizona's Insurance Code that requires surplus lines brokers to give permission or approval for an insurance producer to charge insureds a fee in connection with the placement of surplus lines insurance. Therefore, while it may be prudent for a surplus lines broker and insurance producer to discuss any fees the producer may be charging and for the producer to coordinate remittance of the stamping fee and surplus lines premium tax due, surplus lines brokers are longer obligated to report or remit amounts due in connection with fees charged by producers. Moreover, we do not believe that surplus lines brokers would need to give permission for the producer to charge the fee.
What are acceptable procedures for agents/brokers to charge fees both for surplus lines and admitted business?
A.R.S. § 20-410(C)(1) authorizes surplus lines brokers to charge fees if the fee and the services for which the fee is being charged are disclosed to the insured or the insured's representative and are agreed to in writing by the insured or his representative.
There do not appear to be any requirements or limitations for insurance producers to charge a fee in connection with the placement of commercial insurance.
Surplus lines brokers may charge a fee as long as they comply with the requirements of A.R.S. § 20-410(C)(1), and while there is no express requirement for insurance producers, we believe producers should follow the general requirements of this statute if they charge fees in connection with surplus lines transactions. There do not appear to be any express statutory requirements applicable to insurance producers charging fees in connection with the sale of commercial insurance. However, we would similarly advise producers to disclose the fee in writing, describe what services the fee is covering, and obtain the insured or insured's representative's approval for the fee in writing. As noted above, there is no express requirement for the form of disclosure that brokers or agents must use. As such, we believe disclosure may be made in the form of a letter, inclusion on the policy declarations page or any other written format.
What are producers due diligence requirements when a class of business appears on the export list?
A.R.S. § 20-407(A) provides that surplus lines coverage may be procured from a surplus lines broker if the coverage is: (i) a recognized surplus line pursuant to section 20-409 or (ii) not procurable, after diligent effort has been made to procure coverage or the coverage to the full extent the insurers are willing to insure, and the placing of insurance with an unauthorized insurer is not for the purpose of securing advantages either as to premium rate or terms of the insurance contract.
A.R.S. § 20-409 authorizes the Department of Insurance to issue an order identifying certain types of insurance as recognized surplus lines for which due diligence is not required.
On October 4, 2013, the Department of Insurance issued Order No. 13A-071-INS, which contains, among other things, the current Surplus Lines Export List by category or type of coverage. Each category has multiple codes, beginning with Code 00. For each category, code 00 is "diligent effort completed*." None of the other lines listed in any category of coverage includes an asterisk. By way of example, Code AVPD, Aircraft Physical Damage, includes code 00 (diligent effort completed), 01 (antique aircraft), 02 (balloon- hot air and gas), 03 (charter service), 04 (chemical spray and/or drift), etc. The asterisk in the Order refers to diligent effort, which is defined under A.R.S. § 20-401(4) as "having sought insurance for the same risk from at least three insurers authorized in this state to write the particular insurance coverage or type, class or kind of insurance." Thus, it appears that for each category of surplus lines coverage, if the specific type of coverage placed is not expressly listed, such as antique or hot air balloon, the surplus lines broker must conduct due diligence consistent with A.R.S. § 20-401. In reporting the policy placed, the surplus lines broker would then either report code 00, as having conducted due diligence in accordance with the requirements of A.R.S. § 20-407(A), or enter the code for the specific sub-type of coverage placed, for which no due diligence is required.
In sum, we would advise both surplus lines brokers and other insurance producers who plan to charge a fee in connection with the placement of surplus lines coverage to disclose, in writing, the amount of the fee and the services to be provided and to obtain the insured or insured's representative permission to charge the fee in writing. While we believe it would be beneficial for the producer and broker to discuss and coordinate the reporting of fees and remittance of stamping fees and premium taxes due in connection with fees charged, with the enactment of HB2149, surplus lines brokers are no longer responsible for reporting fees charged by insurance producers or remitting the stamping fees and taxes due on such fees. We also believe that courts interpreting Arizona's Insurance Code would conclude that any fee charged in connection with surplus lines transactions would be subject to both the stamping fee and surplus lines premium tax. Finally, we believe that if the specific line of coverage is not listed on the Surplus Lines Export list, the broker must conduct due diligence, or obtain three declinations from admitted carriers, before obtaining the coverage from a surplus lines insurer.