The Producer Without Surplus Lines Authority
Danielle holds an Indiana property and casualty producer license but no surplus lines authority. Her agency principal tells her to 'go ahead and write it under the agency,' and she places an $18,000-premium surplus lines policy on a grain elevator, signing the application as producer. Commissions are paid to the agency. Nine months later, during renewal, she learns the agency never obtained surplus lines authority for her. Meanwhile the file - search notes, the signed disclosure, and tax remittance receipts - sits in a storage unit, and the agency's practice is to purge files three years after the policy is written.
1. Was the placement lawful, and who bears responsibility - Danielle, the principal, or both?
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The placement was not lawful. A property and casualty license does not include authority to procure surplus lines business; that is a separate authority the individual must hold, and the agency must be licensed for it as well. Signing the application as producer is the act that triggers the violation, and 'the principal told me to' is not a defense to an unlicensed placement.
Danielle: she acted outside the scope of her license, and licensees are charged with knowing what their authority covers. Discipline exposure includes fines, suspension, and a requirement to obtain the authority before resuming.
The principal and agency: directing the placement, accepting the commissions, and failing to secure authority is a supervisory failure, and typically the more serious one in a market-conduct review. Agencies are expected to have controls that prevent unlicensed activity, and 'write it under the agency' reflects an intentional workaround.
Practical exposure: the commissions on an unlawful placement are vulnerable to disgorgement or refund, and if the insured suffers a coverage dispute traceable to the placement, both the individual and the agency face E&O exposure.
2. What records must be kept, for how long, and does offsite storage or a three-year purge create a problem?
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What: the documentation that proves the transaction was lawful and the tax was paid - the diligent search record with declinations, the signed disclosure and acknowledgment, evidence of the insurer's eligibility, the policy and endorsements, premium and fee accounting, and proof of premium tax remittance and annual filing.
How long: Indiana's retention period for surplus lines records is five years, and the clock runs from the policy expiration or the transaction date - not from the day the file was opened. A three-year purge from the write date cuts off records that must still be retrievable.
Where: offsite storage is acceptable if records can be produced promptly on Department request; a storage unit nobody has inventoried is a records failure waiting to become a finding. Records must also be legible and attributable to the specific transaction.
Practical consequence: the grain elevator account cannot now be defended or reconstructed, and the agency cannot prove the tax was remitted. That converts a licensing defect into an evidentiary one, and it will follow the agency into any examination.
3. What should happen to the commissions, and how should the agency remediate?
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Commissions: commissions generated by an unlicensed placement are at risk. The Department can order restitution or disgorgement, the insurer or wholesale broker may seek return, and if the policy is disputed the insured may argue the agency was never entitled to compensation. Set the commissions aside rather than spend them, and do not assume they are earned.
Remediation, in order:
- Stop all surplus lines placements by Danielle today.
- Obtain the surplus lines authority through the required licensing steps before any resumption.
- Audit every placement Danielle touched, and every account the agency wrote through that workaround, for the same defect.
- Self-report to the Department with the audit results; voluntary disclosure is treated very differently from discovery during an examination.
- Reconstruct the grain elevator file from carrier and wholesale broker records, and confirm the tax was remitted.
- Replace the retention practice with a five-year schedule keyed to expiration, and put a licensing check in the account-opening workflow.