Ethics and Fiduciary Responsibilities of Surplus Lines Brokers
Fiduciary Duty
A surplus lines broker acts in a fiduciary capacity with respect to premiums collected from insureds. Premiums are held in trust and must be remitted to the insurer (or the tax authority) promptly. Commingling premium funds with the broker's operating funds is prohibited. The broker must maintain records sufficient to trace each premium dollar.
Duties to the Insured
- Honesty and full disclosure: disclose non-admitted status, lack of guaranty protection, and compensation.
- Reasonable care: conduct a genuine diligent search and place with an eligible insurer.
- Confidentiality: protect insured information.
- Competence: understand the coverage being placed.
Duties to Insurers and the State
- Remit premium promptly.
- Remit surplus lines tax on time.
- Maintain the surety bond.
- Cooperate with Division examinations.
Traps
- Assuming "fiduciary" applies only to premium - it also covers the duty to act in the insured's interest in placement.
- Confusing a broker's duty to the insured with a duty to the insurer; the broker owes duties to both, but premium is held in trust for the insurer.
- Overlooking that ethical violations (misrepresentation, concealment) are also licensing violations.
Rule of Thumb
"Hold premium in trust, disclose everything material, place only with eligible insurers, and document the file." That sentence captures the ethical core of the license.
Worked Example
A broker uses collected premium to cover payroll before remitting to the insurer. That is commingling and a breach of fiduciary duty - grounds for license suspension.