|FIDUCIARY DUTY |
Fiduciary duty is statutory. California Insurance Code requires P&C insurance producers to receive, maintain, and disburse insurance premium and return premium funds in a fiduciary capacity.
Acting in a fiduciary capacity is to carry out fiduciary duty obligations defined in the Carrier-Broker Agreement.
P&C insurance producers are personally responsible for fiduciary duty violations by anyone in the agency.
According to California Insurance Code licensed insurance producers have the following fiduciary obligations:
- Separate operating funds from premium fiduciary funds
- Treat fiduciary premium funds as trust assets
- Determine the ownership rights to trust assets
- Maintain complete and accurate accounting records of premium and non-premium funds maintained in a trust bank account
- Keep premium trust account solvent at all times and provide solvency documentary evidence when required
- Remit premiums net of commission to insurance carriers when they come due
- Refund returned premiums to insureds and/or finance companies after they are reimbursed by carriers
- Use return premium to offset the premium due by an insured on another policy
Insurance carriers grant licensed insurance producers the authority to perform the following activities in a fiduciary capacity:
- Collect transacted premiums from insured;
- Collect endorsement premiums from insured;
- Setup loans to finance insurance premiums and receive from finance companies the amount of financed premiums;
- Maintain premium fiduciary funds in interest-bearing accounts and retain the interest earnings;
- Invest premium fiduciary funds in types of securities approved by law and retain investment income;
- Use returned premiums to offset premiums due by insured on another policy;
- Transfer earned commission to the agency operating account after premium payment checks are cleared.
According to California Insurance Code fiduciary funds include:
- Premiums collected from insureds under an insurance policy;
- Financed premiums received from a finance company pursuant to premium finance agreements;
- Return net premiums reimbursed by insurance carriers;
- Return commissions reimbursed from the operating account;
Interest earnings accrued on premiums and return premiums will be considered fiduciary funds if policyholders do not consent in a signed agreement that producers keep them.
FIDUCIARY DUTY VIOLATIONS
The following activities are considered violations of California Insurance Code:
- Maintain premium funds, net of commissions, in places other than trust bank accounts or securities permitted by law;
- Disburse premium funds to entities other than insurance carriers or, in case of returned premiums, policyholders or financing companies entitled to refunds;
- Divert or appropriate premium funds for personal use, business acquisitions or expansion, or use to cover general operating expenses. Any of these activities constitute theft. Insurance producers may loose their business license or be criminally prosecuted for theft as provided by law;
- Use premiums collected under one policy to remit to carriers premiums due on another policy;
Transfer commissions to the operating account before the bank clears the payment checks. Such transfer is permitted only if sufficient personal funds are maintained in the trust bank account