Producer-Only Staff, Referral Fees, and Gift Cards
A Honolulu insurance agency holds a producer license but not a surplus lines broker license. Its employee, who holds a producer license, solicits a $3 million excess flood policy for a client and negotiates terms directly with an unauthorized insurer. The agency's principal, who holds a Hawaii surplus lines broker license, reviews and signs the binder. The agency pays the employee a 20% commission and pays $5,000 to an unlicensed marketing consultant for the referral. At closing, the client receives a $1,000 gift card. The insurer is eligible in Hawaii. The client later complains that no one told her the insurer was not admitted. The agency says the principal's license covers the transaction because he signed the binder.
1. Identify the licensing and compensation violations in this transaction.
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The employee held only a producer license. Soliciting and negotiating surplus lines coverage requires a Hawaii surplus lines broker license. The employee's direct negotiation with the unauthorized insurer was unlicensed activity; the principal's review and signature do not cure it, because the licensed person did not perform the regulated activities.
The $5,000 payment to the unlicensed marketing consultant is also a problem: it is contingent on the placement, so it operates as an unlawful sharing of commission with an unlicensed person. The $1,000 gift card is an inducement or rebate unless it fits a permitted exception. The missing unauthorized-insurer disclosure is a separate violation. Possible consequences include license discipline, fines, disgorgement, and E&O exposure. The agency's claim that the principal's signature covers the transaction is not a defense.
2. What should the agency have done differently, and what disclosure was owed to the client?
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The surplus lines broker should have handled or directly supervised the solicitation and negotiation, with the unlicensed employee limited to clerical or referral activities that do not involve discussing terms. Any payment to an unlicensed referrer should not be contingent on the sale; if Hawaii permits a referral fee, it should be nominal, disclosed, and not a commission split. The gift card should not be offered.
Before placement, the broker should have given the client written notice, acknowledged by the client, that the insurer is not authorized in Hawaii and that the guaranty association does not protect the policy. The agency should now deliver the disclosure, review compensation arrangements, retrain staff, and consider self-reporting to the Insurance Division. The broker should also confirm that the policy's claims and jurisdiction provisions were explained.