Earlier this month, Florida passed House Bill 301 to remove the cap on the amount of fees that may be charged by a surplus lines broker in connection with the procurement of surplus lines insurance for a prospective insured.  Instead of the old cap of a maximum of $35 per policy, surplus lines brokers will be able to charge any fee that is “reasonable” and disclosed to the insured in advance.  Once signed in to law, Florida will join a number of other states that permit “reasonable” surplus lines producer fees without specifying a monetary cap.

California, by contrast, has put the industry on notice that severe penalties could face both producers and insurers if fees are charged in an agency capacity.  In particular, on May 7, the California Court of Appeal upheld a $27.5 million fine against an insurance carrier for charging illegal fees.  While California generally allows for brokers to charge fees (subject to certain restrictions), agents representing the interests of insurance carriers may not charge fees in excess of the premium as specified in the policy.  The court found that the insurance carrier had incorrectly labeled its producers as “brokers” when, in fact, such producers were agents for the carrier.

There could be potential implications from California’s recent ruling on surplus lines insurers and brokers.  Under California Surplus Lines Bulletin #997 (available here), surplus lines broker fees are considered to be permissible, provided that they are “disclosed to, and accepted by the prospective [consumer], prior to the placement of coverage.”  And, typically, a surplus lines  broker must act in the interests on the insured.  However, in instances where surplus lines brokers maintain close relationships with surplus lines carriers, enter into binding producer agreements with insurance companies or otherwise promulgate marketing and advertising materials for such insurers (which are themselves heavily regulated under California law), there remains a risk that even a surplus lines broker fee could be found impermissible by virtue of the surplus lines broker’s ties to an insurer.