Surplus Lines Distribution System

Surplus Lines Distribution System Notes

Course Information

Course Title: Surplus Lines Fundamentals
Instructor: Faulkner
Institution: The Stumbaugh School of Risk Management & Insurance
Assignment #2: The Surplus Lines Distribution System
Presentation: PPT-02.02
Affiliated Organization: WSIA (Wholesale & Specialty Insurance Association)
Provider of Knowledge: The Institutes Knowledge Group™

Functions of Surplus Lines Intermediaries

General/Common Functions (Universal for All Intermediaries)

Selling and Prospecting
Other Functions Specific to Surplus Lines Intermediaries

Specific Functions Performed

Maintaining Documentation
- Purpose:
  - Document and record customers' transactions.
  - Transcribe oral conversations conducted via phone or face-to-face (F2F).
- Importance of Documentation:
  - A lack of proper documentation can lead to Errors and Omissions (E&O) claims against the intermediary.
  - Must have policy copies available upon request by regulators to maintain compliance.
Counseling
- Role in Risk Management Process:
  - Assist in the identification, analysis, treatment, and monitoring of risks.
- Importance in the Surplus Lines Market:
  - Critical for addressing ‘special’ risks that require tailored coverage options.
  - Must possess an in-depth understanding of coverages in order to suggest appropriate options to clients.
Filing Diligent Search Affidavits
- Affidavit Definition:
  - A written statement confirmed by oath.
- Diligent Search Requirement:
  - Proof of last resort confirming the extent of searches for insurance coverage.
- Responsibilities:
  - Retail agents must perform the search.
  - Surplus lines intermediaries are responsible for documenting the process.
Collecting Premium Taxes
- Tax Collection Process:
  - The policyholder pays the premium.
  - The surplus lines intermediary is tasked with collecting and remitting the premium taxes to state authorities.
Practicing Sound Management
- Office Management:
  - Must maintain an organized and efficient office to ensure smooth operation.
- Fiduciary Responsibilities:
  - Acts in the best interests of clients, ensuring responsible handling of their funds.
- Legal Transactions:
  - Adhere to legal requirements during transactions with clients and insurance companies.
- Ethical Standards:
  - Maintain the highest ethical standards in all dealings.

Case Studies and Real-World Applications

Case Study: Ice Cream Sandwich Maker

Company Involved: Crave Better Foods (CBF)
Incident Overview:
- CBF is suing its insurance broker, Carlson & Carlson, Inc. (C&C), for negligence.
Claim Details:
- Allegation of failing to properly secure product recall insurance after incurring a $4.5 million loss from a recall of Chipwich products.
- Damages included destroyed inventory, excess freight charges, and lost sales, excluding reputational damage.
Legal Claims Against the Broker:
- Professional Negligence: CBF claims the broker did not secure adequate coverage.
- Breach of Contract: CBF alleges a contract failure regarding insurance coverage recommendations.
- Negligent Misrepresentation: CBF argues the broker misrepresented coverage options, leading to financial detriment.

Case Study: Broker Conviction

Individual Involved: Christopher Ramos, a California insurance broker.
Crimes Committed:
- Stealing nearly $190,000 from clients and committing forgery.
Outcome:
- Sentenced to four years in prison plus five years of supervision after being convicted of grand theft and forgery.
- Ordered to pay restitution to victims.
Key Issues:
- Abuse of trust as a licensed insurance broker for personal gain.
- Drafted fake certificates of insurance to mislead clients.

CPCU Designation Canons and Ethical Standards

Significance of CPCU Designation:
- Reflects commitment to ethical behavior and upholding integrity within the profession.
Canons Include:
- Canon 1: Put People First
- Canon 2: Keep Learning
- Canon 3: Be Fair and Honest
- Canon 4: Enhance Risk Management and Insurance
- Canon 5: Elevate Professionalism
- Canon 6: Maintain Ethical Relationships
- Canon 7: Educate the Public
- Canon 8: Uphold the Designation
- Canon 9: Maintain the Integrity of the Code

Functions of Different Types of Brokers and Intermediaries

Functions of Wholesale Brokers

Key Functions Include:
- Analyzing loss exposures and preparing insurance submissions suitable for underwriters.
- Selecting the appropriate market for coverage.
- Communicating quotes back to retailers and confirming coverage and limits to prevent Errors & Omissions.
- Providing post-sale services including communication of policy changes and claim notices.
- Soliciting renewals for ongoing client relationships.

Functions of Managing General Agents (MGAs)

Characteristics:
- Serve similar functions to wholesalers but with binding authority.
Binding Authority Requirements:
- Must stay within established authority and insurer guidelines to maintain authority.
- Losing authority may occur due to high loss ratios.
Responsibilities Include:
- Understanding loss exposures, coverages, and pricing strategies.
- Issuing policies and providing post-sale service.
- Acting as a liaison between retailers and insurers for policy changes and claims notices.
- Soliciting renewals.

Functions of Program Managers

Program Business Focus:
- Development of special coverages or pricing for insureds with similar characteristics.
Duties Include:
- Issuing policies on behalf of insurers and marketing programs to retail agents and wholesalers.
- Handling small claims and placing reinsurance as needed.
- Maintaining binding authority within program guidelines.

Functions of Lloyd’s Brokers

Primary Functions:
- Match customer needs to the appropriate syndicate at Lloyd’s.
- Build relationships with leading underwriters to secure favorable policy terms and conditions.
- Possess in-depth knowledge of lead underwriters to facilitate optimal coverage for clients.