Producer Licensing and Surplus Lines Authority
A producer holds an Arkansas property and casualty producer license but has never obtained a surplus lines broker license. A longtime commercial client needs coverage for a vacant building that admitted carriers will not write. The producer's agency principal tells the producer to go ahead and place the risk with a surplus lines insurer because "the P&C license covers everything." The producer places the policy and collects a $6,000 premium, keeping a $900 commission. Two months later, the Arkansas Insurance Department sends an inquiry. The producer also discovers that a separate producer in the agency, who does hold a surplus lines license, was on vacation and could have placed the risk upon return.
1. Did the producer have authority to place this surplus lines policy? What are the consequences?
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No. A general property and casualty producer license does not authorize surplus lines placements. Arkansas requires a separate surplus lines broker license (and compliance with its requirements) to negotiate or place surplus lines coverage. The agency principal's statement that "the P&C license covers everything" is incorrect.
Consequences may include regulatory action against the producer for unlicensed surplus lines activity, potential forfeiture or disgorgement of the $900 commission, penalties, and possible license discipline. The agency may also face exposure. The fact that another licensed producer was temporarily unavailable does not create authority - the producer could have waited or arranged for a properly licensed producer to handle the placement.
2. How should the producer respond to the department's inquiry?
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The producer should respond truthfully and completely, without minimizing the error. The response should:
- Acknowledge that the producer did not hold a surplus lines broker license at the time of placement.
- Explain the circumstances (client need, admitted market unavailability, reliance on the principal's incorrect instruction) without using them as an excuse.
- Identify the licensed surplus lines producer in the agency and cooperate in any remediation, such as having the placement reviewed or re-papered by a properly licensed producer.
- Provide the policy, premium, and commission records requested.
Misleading the department or concealing the commission would aggravate the violation. The producer should also stop placing any further surplus lines business until properly licensed.