Verbal Notice and a Referral Commission
Sunrise Hospice, a 40-bed facility in Kalamazoo, cannot get admitted coverage for professional liability because of a 2023 incident involving a medication error. A consultant, Pat, introduces the hospice's administrator to producer Dana. Pat is not licensed and does not negotiate, but Dana agrees to pay Pat 15% of the $30,000 surplus lines premium if the policy binds. Dana is a Michigan surplus lines producer. Dana places the risk with an eligible surplus lines insurer. At the meeting, Dana tells the administrator verbally, 'This insurer isn't admitted in Michigan, so there's no guaranty fund.' Dana does not provide a written notice. The policy is claims-made with a retroactive date of January 1, 2024. The 2023 medication error is later reported as a claim. The insurer denies on the retro date.
1. What written disclosures or notices must Dana provide, and when? Does the verbal statement suffice?
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No, the verbal statement is not enough. Michigan requires a surplus lines producer to give the insured a written notice, typically before placement or with the application or policy, that clearly states: (1) the insurer is not admitted in Michigan; (2) the insurer is not subject to Michigan's insurance regulation; (3) the policy is not covered by the Michigan guaranty association or fund; (4) the name and address of the surplus lines insurer; and (5) the name of the surplus lines producer. The notice should be conspicuous and signed or acknowledged by the insured. Dana's oral statement covers only one element, no guaranty fund, and even that is incomplete because it does not identify the insurer or explain the lack of regulatory protection. The notice must be documented in the file. If Dana placed the policy without the written notice, Dana should correct the file immediately by providing the notice and obtaining an acknowledgment, but the late correction does not erase the earlier violation. The notice is not a substitute for explaining coverage terms such as the retroactive date.
2. Is the 15% commission-sharing arrangement with Pat lawful? Explain.
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Probably not. Insurance producer licensing laws generally prohibit paying commissions or other compensation to an unlicensed person for soliciting, negotiating, or selling insurance. Pat is not licensed. If Pat only made a referral and did not discuss coverage or negotiate terms, a modest referral fee may be permissible in some circumstances, but 15% of the premium looks like commission splitting and creates a strong inference that Pat was compensated for the placement. The arrangement should be in writing, disclosed to the insured if required, and must not be contingent on the sale in a way that constitutes unlicensed solicitation. Dana should not pay Pat until Dana confirms Michigan's referral-fee rules and the insurer's appointment and compensation rules. If Pat did more than a bare introduction, the payment is likely unlawful and could subject Dana to license discipline. The safer course is to pay no commission to Pat and, if a referral fee is allowed, keep it nominal and documented.
3. Is the insurer's retroactive-date denial enforceable, and what should Dana have documented?
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The denial is likely enforceable if the policy is a claims-made policy with a retroactive date of January 1, 2024, and the claim arises from an act before that date. The 2023 medication error occurred before the retroactive date, so the policy does not cover it unless the insurer issued a prior-acts endorsement or the retroactive date was later. The insured's belief that professional liability covered the incident does not override the policy language. Dana's failure is not the denial itself but the lack of documentation that Dana explained the retroactive date and the difference between claims-made and occurrence coverage. Dana should have: (1) reviewed the retroactive date with the administrator; (2) explained that the 2023 incident would not be covered; (3) offered prior-acts coverage if available; (4) documented the conversation and any rejected option; and (5) obtained a signed coverage acknowledgment. Because Dana did not, the insured may assert an errors-and-omissions claim, but that does not create coverage under the policy. Dana should notify the E&O carrier and preserve the file.