2009 California Insurance Code - Section 995-995.7 :: Article 13.3. Obligations Of Automobile Insurers And Their Agents Under Contingent And Retrospective Compensation Arrangements

995.  (a) As used in this article, "contingent compensation
arrangement" means an arrangement having as its purpose the payment
of a variable commission by the insurer, depending on the overall
operating profit on the insurance business produced and handled by
the payee, with other provisions of the arrangement auxiliary or
incidental to such purpose.
   (b) As used in this article, "retrospective commission arrangement"
means an arrangement having as its purpose the retention by the
insurer of a fixed proportion of the gross premiums, or gross
premiums plus policy fees with the balance of the premiums, or
premiums plus policy fees, retained by the producer of the business,
who assumes to pay therefrom all losses, all subordinate commissions,
loss adjustment expenses and his profit, if any, with other
provisions of the arrangement auxiliary or incidental to such
purpose.
   (c) The phrases defined in subdivisions (a) and (b) of this
section shall not be deemed to include a contingent commission
arrangement of a producer, managing general agent, surplus line
broker, or general agent based wholly or partly on underwriting
results, unless the arrangement guarantees an agreed return to the
insurer which may exceed the underwriting profit actually earned by
the insurer on business written through the producer, managing
general agent, surplus line broker, or general agent.
   (d) As used in this article, "policy fee" means any sum specified
in the policy as paid, or payable, in addition to the specified
premium, as a consideration for the policy; and does not include
expenses customarily charged to the insured which are not recited in
the policy.
   (e) This article shall apply only to automobile and automobile
liability insurance.

995.1.  An agent, broker, surplus line broker, general agent or
other person operating under a contingent or retrospective
compensation arrangement with any insurer shall promptly notify the
insurer of every policy claim against the insurer of which he has
knowledge with sufficient particulars to enable the insurer to
establish an adequate claim reserve. Every insurer so notified of a
policy claim or receiving independent knowledge of any policy claim
shall promptly make a record thereof and establish a claim reserve
for the same.
   If the commissioner has reason to believe such agent, broker,
general agent or other person is not so notifying the insurer, he
shall give the insurer seven days written notice of such belief and
if the insurer does not correct the situation within seven days
thereafter he may examine such agent, broker, general agent or other
person at the expense of the insurer.
   In the case of any arrangement whereby the producer receives from
the insurer an initial percentage commission to be augmented if loss
ratios or profits are more favorable than a stated standard, the
insurer shall establish a contingent commission reserve for the
amount, if any, which will become due to the producer because of such
favorable loss ratios or profits.
   Notwithstanding any provision of the contingent or retrospective
arrangement, such claims and contingent commission reserves shall be
a liability of the insurer.
   Nothing contained in this section is intended to prohibit
reasonable arrangements between a managing general agent, surplus
line broker or general agent and an insurer which provide (a) for the
amount of claim reserve to be recommended by the managing general
agent, surplus line broker or general agent to the insurer, without
particulars other than those needed by the insurer to establish the
claim reserve on its books, or (b) for the handling of claim reserves
on smaller claims of not more than two thousand dollars ($2,000)
each on a bulk or group basis, upon recommendation of the amount by
the managing general agent, surplus line broker or general agent, or
(c) for the handling of losses not exceeding five hundred dollars
($500) each by the managing general agent, surplus line broker or
general agent without establishment of claim reserves, or (d) for the
reporting of losses and recommended reserves by the managing general
agent, surplus line broker, or general agent on a monthly basis.

995.2.  An insurer shall not claim as an asset by reason of any
provision of a contingent or retrospective compensation arrangement,
any account due from the other party pursuant to such an arrangement
in an amount in excess of the money actually held by such party in a
trusteed bank account for such insurer, unless such party is solvent
without giving effect to any contingent or retrospective compensation
not specifically acknowledged in writing by the insurer as settled
in amount and payable in cash, or usable as an absolute offset
against the insurer, within 90 days.
   If the commissioner has reason to doubt the solvency of any person
dealing with an insurer under a contingent or retrospective
commission arrangement, he may examine him at the expense of the
insurer.
   Nothing contained in this section is intended to modify any
provision contained in Section 1735 of this code.

995.3.  Every person operating under a retrospective or contingent
compensation arrangement with any insurer shall report to the insurer
within a reasonable time, and policy by policy, the full premium
charge including any policy fee made to the insured and the amount of
premium and policy fee, if any, collected from the insured in
respect to each such policy. Such reporting need not be policy by
policy in a case where such arrangement covers only policies which
are all uniform in coverage, uniform as to premium and such premium
is not over ten dollars ($10) annually.
   If the commissioner has reason to believe any such person is not
complying with this section, he shall give the insurer seven days
written notice of such belief and if the insurer does not correct the
situation within seven days thereafter, he may examine such person
at the expense of the insurer.
   Nothing contained in this section is intended to prohibit or
invalidate use of the bordereau method of accounting or accounting by
transmission of computer data by a managing general agent, surplus
line broker, or general agent, nor to require him to report premium
collections to an insurer where the managing general agent, surplus
line broker, or general agent is liable to pay the insurer bordereau
or accounting balances in full whether collected or not.

995.4.  An insurer, notwithstanding the provisions of any contingent
or retrospective compensation arrangement with any person, shall
maintain as a liability, as part of its unearned premium reserve the
unearned portion of all premium charges made to insureds without
deduction for uncollected charges.

995.5.  An insurer, notwithstanding the provisions of any contingent
or retrospective compensation arrangement with any person, shall
report and pay the premium tax liability set forth in the Revenue and
Taxation Code on the basis that it has received the full premium
charge including policy fees made to the insureds under policies less
return premiums as permitted by law.

995.6.  The provisions of Sections 995.1, 995.2, and 995.3
permitting the commissioner, in certain situations, to examine a
person operating under a contingent or retrospective commission
arrangement with an insurer at the expense of the insurer, and the
other provisions of this article, shall not prevent the insurer from
making a contract in advance with such person that in such event the
person will reimburse the insurer for such expense. If in the course
of examining such person the commissioner finds such person also
operates under such contingent or retrospective commission
arrangements with other insurers, he may prorate the expense of
examination on an equitable basis among all the insurers so dealing
with the person.

995.7.  The purposes of Section 816 and the provisions of this
article are to promote the solvency of insurers and the producers
dealing with them under contracts, arrangements and practices therein
described; to protect the public from unjustifiable claims practices
and the inconvenience, hardship and possible loss attendant upon the
insolvency of any of the insurers or persons described therein; and
to prevent any frauds or mistakes which may arise from any of the
contracts, arrangements or practices described therein. In
furtherance of these purposes the commissioner shall at least 90 days
prior to charging any person with a violation of Section 816 or the
provisions of this article make reasonable rules and regulations
clarifying or defining any word, term or phrase used in Section 816
or in this article, including establishment of detailed standards to
determine solvency as that word is used in Section 995.2. Such rules
and regulations shall be adopted, amended or repealed in accordance
with the procedures provided in Chapter 4.5 (commencing with Section
11371) of Part 1 of Division 3 of Title 2 of the Government Code.