But the Insurtech’s licensure of the entity and producer licensure of all of its individuals is alone not sufficient for the Insurtech to lawfully operate and be paid when dealing with insureds or insurable interests in Washington. Rather, each individual acting for the entity must “affiliate” with the Insurtech producer. [10] And both the Insurtech entity and individual must be “appointed” by the insurer when the producer is operating in the capacity of an insurance agent. [11]
Non-resident individual and entity producers must keep their license(s) active in their home state to also operate and request licensure in Washington as a non-resident producer, again both for entity and individuals. [12] Noted above, any Washington non-resident producer license will require a correspondingly similar license in the home state. [13]
And lastly, though beyond the scope of this article, there are red flags to investigate the need to cease operations if the Insurtech does not hold the correct license (in addition to a producer license): such as not working with an “unauthorized” or “nonadmitted” insurer (called a “surplus line insurer” in Washington), if the Insurtech (and its employee(s)) lack a valid Washington Surplus Line Broker license. [14] Other red flags to explore include whether an Insurtech can lawfully adjust claims absent an adjuster license. [15] And red flags when indicating an individual is relying on another’s individual producer license to issue evidence of insurance to a customer, such as a binder or certificate of insurance (even if it seems convenient that someone in your office has a Washington nonresident license, just because you individually don’t have the correct license). [16]
Rough Seas Ahead: Is The Insurtech Truly An MGA? Does It Truly Want To Be An MGA?
Many Insurtech entities broadcast that they are a Managing General Agent (“MGA”), meaning the Insurtech operates as MGA for an insurer and enjoying the substantial rights and responsibilities of delegated insurance underwriting authority. Perhaps after reading this article an Insurtech wish to explore referring to itself instead of a MGA as perhaps something else, such as a Managing General Underwriter (“MGU”) or “Program Administrator”, or maybe just as their license indicates (“producer”) to reduce substantial MGA licensing and operational complexity.
“MGA”/ “Managing General Agent” has specific meaning and strenuous requirements as a Managing General Agent as that term is defined under Washington law. [17] This legal MGA meaning largely tracks the NAIC Model Act. [18] An Insurtech producer in Washington may be subject to MGA licensure if the entity manages/underwrites/administers five percent or more of the annual Gross Written Premium of an insurer and also acts to adjust claims, or place reinsurance, or both. [19] Operating (and calling the Insurtech) an MGA requires a specific MGA producer license (that is a separate producer license) as a prerequisite, insurer appointment (as an MGA), license application approval, a bond, and proof of errors & omissions insurance. [20] The Insurance Commissioner gets to review and approve the MGA contract with the Insurtech’s insurer. [21] And the Insurtech MGA and its insurer, once approved by the Insurance Commissioner, are subject to substantial oversight and examination. [22]
But there is no defined term of being a Managing General Underwriter (or “MGU”) in Washington. [cf. below, use of a term that implies a producer is an insurer, has authority or some privileges and responsibilities other than an insurance producer agent or broker may be considered a deceptive or untrustworthy act, subject to enforcement.]. The point here is suggesting it is a good idea to investigate what to call the Insurtech, and be accurate in the name and description to not run afoul of producer licensing laws and regulations, and be extremely careful about using the term MGA, absent specific, separate licensure as one.
Compensation Choppy Waters: Insurtech Fees, Sharing Commissions, And Paying for Referrals.
An Insurtech operating as a properly licensed Washington insurance producer may be paid a commission by an insurer for placement of a Washington risk. [23] Or the licensed producer Insurtech could be paid a fee, or careful precise circumstances a combination thereof. [24] However, an Insurtech licensed as a producer charging/being paid anything more than a commission from an insurer, must take great care to fulfill disclosure and insured approval requirements, especially when the producer is acting as an agent dealing directly with the insured. [25] Insurtech producer commissions cannot exceed what is approved in an authorized insurer’s rate filing. [26] Should the Insurtech wants to charge more sales commission than what the insurer states, the Insurtech producer should carefully investigate Washington law. More on the “rate” below.
If the Insurtech is not licensed as a producer, but wants to still be paid for working with other licensed business producer partners, payment is prohibited (to the unlicensed Insurtech) unless some extremely limited and unique Washington laws are carefully and closely followed that allow, in very restricted circumstances, for an Insurtech to be paid for operating in, related to, or alongside the business of insurance. For example, if an Insurtech is helping to source Washington customers to explore and maybe buy insurance, so long as the Insurtech is not selling/soliciting/negotiating insurance, then under very narrow circumstances an unlicensed Insurtech may receive some compensation from an insurer, producer, or both, as a gift or fee for referring business. [27] Some highlights of the limitations to explore should an Insurtech wish to be paid by a producer licensee, include that the payment should not be based on a Washington insured completing an application, should not be based either on actual sales, and whatever the unlicensed entity publishes or communicates to a Washington insured or for any Washington risk, must not include any discussion or recommendation of a particular kind of coverage, for a specific insurer so as to not risk to level of producer license required activity. [28] On the other end of the referral; those licensees working with an unlicensed Insurtech business partner may want to carefully examine whether improper payment can result in insurance code violations not only for the unlicensed Insurtech, but also the paying insurance producer or insurer for failure to closely and carefully follow the narrow and limited payment circumstances. [29]
Not only are these narrow payment restrictions for a non-licensed Insurtech found in law, but also available in guidance from the Insurance Commissioner. Discussed more fully below, in 2021 the Insurance Commissioner issued a Technical Assistance Advisory and also engaged in enforcement actions to help identify, educate, and seek to prevent potential problems related to unlicensed Insurtech activity crossing over the border into the territory of requiring an insurance producer’s license for business activity and payment. [30]
Keeping The Operation Afloat: Sales Margins Are Too Small – Price Increase Problems.
Thin margins may compel an Insurtech to try to find additional revenue sources. In insurance, adding costs is something that an Insurtech should very closely examine for compliance problems. For example, in Washington an insurance producer cannot add more commission than what the insurer indicates that the regulator has approved in the insurer’s rate filing. [31] This is so because the approved and stated premium is the total amount that can be charged to a buyer of insurance from an authorized/admitted insurer. [32] As a consequence, any increase in commission beyond what an authorized/admitted insurer has stated to the producer should be explored for compliance so as to not risk disgorgement and enforcement. And on the other side of the equation, insurers must also be very careful not to violate Washington law as to bonus or extra commissions when allowing an Insurtech producer to “mark up” the approved all-in price for the insurance policy approved in Washington. [33] Noted above, a producer may be paid commissions, fees, or both under very precise and careful circumstances, should the Insurtech producer believe that the approved rate and commission create insufficient margins. Licensed Insurtech producers should carefully examine any plan to charge more for the total cost related to the insurance purchase if this exceeds the approved commission amount.
Safely Underway: Insurtech Trade names, Legal Names, DBA’s - Marketing, advertising, and other minefields.
After an Insurtech becomes a licensed producer [34], and all individual producers also become licensed and affiliated (and all individuals and entity appointed by its insurer(s) if operating as an agent producer), perhaps the next thing for the Insurtech to consider is offering its insurance solutions to the marketplace. Marketplace offerings can of course include a website, making an application “go live”, and overall marketing, social media, print, and for joint ventures. First and foremost are disclosures. Should a licensed insurance producer decide to market a specialty program, or joint venture, or really market/publish/advertise anything other than using its full name (as stated on its producer license), such as the use of a trade name (or doing business as (“DBA”)) or unique “program name”, the producer should explore having its producer trade name(s) registered for any publication, website, application, joint venture, and so forth. [35] Any Insurtech producer involved in such an enterprise should investigate using a trade name that deviates or differs from the full and accurate name of the licensed insurance producer as that entity must be registered. [36]
Advertising also must be done with careful precision. Any Insurtech publishing, creating a website, joint venture, embedding insurance, or making anything that could constitute an advertisement about an insurance company or its coverage may want to consider exploring specific disclosure requirements that ought to consider including a great amount of identifying information, which understandably can often be cumbersome when advertising space is limited. [37] In addition to this disclosure requirement, there is also a critical obligation for an Insurtech to explore to closely comply with Washington requirements when adding information about the insurer’s rating. [38] Incomplete, or faulty advertisements may also be a “deceptive” act that could compel regulatory enforcement when not indicating properly the “scale of the rating”. [39]
Coverage descriptions and insurance applications can also be a minefield of insurance code violations and should be closely tailored with experienced counsel. For example, descriptions of coverage and ratings must be accurate, fully disclosed, and not misleading. [40] Similar to this, adding a tradename or other modification of the policy or application could be a violation. [41]
The golden rule for producers for all activity, especially advertising, is to be truthful, forthcoming, and not misleading. [42]
All Aboard: Embedded Insurance and Point of Sale Issues
Embedded insurance often is described as including insurance coverage at the point of sale in a transaction when someone is buying something other than insurance, such as a product, vehicle, service and travel. [43] Insurtech’s should closely investigate “tying” and other “Unfair Practices and Frauds” issues, that are beyond the scope of this introduction whenever they wish to add their insurance offering to another transaction. [44]
In addition to the points (mentioned above) about requisite licenses and referral payment, great care should be taken when someone other than a licensed producer has any contact with a potential purchaser of insurance, be it through a website, application, email, chat, telephone, in-person, or really any publication or contact. Same goes true for a producer or insurer working with a business partner with an embedded transaction with a non-licensee. Embedded examples involving insurance often are an “add-on” purchase at check out, with insurance not being the primary transaction, such as purchasing an airline ticket with an option to purchase travel insurance at the point of sale.
As a practical example, the Insurance Commissioner has determined that in addition to any activity requiring a producer license (such as those for legally defined terms of “sales”, “solicitation”, or “negotiation”), the Insurance Commissioner has determined that anywhere insurance is marketed or discussed (in addition to potentially needing a license), all communication must accurately and fully disclose in clear terms the insurance involved. [45] The Washington Insurance Commissioner has found it is an unfair practice for an insurer to conduct business in any name other than its own legal name, including with joint ventures and embedded insurance, such as when an unlicensed business partner offers insurance to its customers/business partners, and by not fully disclosing insurance activity. The Washington regulator has found certain activity to be the publishing or disseminating of “false”, “deceptive”, or “misleading representations or advertising” when conducted by a non-licensee acting in the scope of what is required of those holding a valid insurance producer or insurer’s license. [46]
Rough Seas: What If It Is Just A Link Pointing To An Insurtech’s Licensed Producer Partner?
“Embedded Insurance” mentioned above in this article, contemplates providing the potential purchaser with information about a kind of insurance, often with a particular insurer in mind for a convenient insurance purchase “at check out”, or frequently provides a link to explore insurance further with a licensed producer at the time of the sale. Similar, but distinct in the regulator’s mind is a website or application or similar publication that acts as a “review” entity to help the reader/user to understand more about insurance, and perhaps make educated comparisons. Also unlicensed, the regulator has interpreted these types of entities/websites to be “review” publications to discuss/compare insurance, but does not seek to consummate the applying for insurance, or purchase at the time of sale. Rather, a “review” entity is often characterized as something more journalistic or as a buyer’s resource, that includes providing information (often a link or button feature) to go directly to a producer to explore more about the insurance.
The Insurance Commissioner recently brought a pair of regulatory enforcement actions involving a review operation where the regulator determined that the venture “crossed the line from a referral to unlicensed solicitation where it discussed the terms of the policies . . . and encouraged the consumer to select this particular . . . insurance.” [47] Both the reviewing entity and the producer receiving customer inquiry (or “traffic”) can violate the insurance code as the producer cannot accept business from an unlicensed producer performing unlicensed insurance tasks. [48]
A publication (or website, or application, and so on) that seems to be reviewing, comparing, and/or discussing insurance must, according to the Insurance Commissioner, restrict discussion of these tasks to those that are properly licensed. Discussed earlier in this article, in certain very limited and restricted circumstances, a licensed producer may pay an unlicensed entity for select marketing, but this must be very carefully done. [49] Otherwise, a licensed producer may not accept a referral from the reviewing entity if its tasks require a license. [50]
In addition to bringing enforcement actions, mentioned above, the Insurance Commissioner also provided written guidance in the form of Technical Assistance Advisory (“TAA”) about reviewing websites and what insurance activity is permissible, and which insurance activity requires a license. [51] The Insurance Commissioner used this TAA as guidance “for websites that provide reviews of insurance” and the insurers and insurance producers working with the reviewing entity.
The TAA includes great detail of licensed producer activity such as what constitutes “solicit” of insurance, that boils down to urging someone to purchase a particular type of insurance from a particular insurer. The Insurance Commissioner found that regardless if the reviewing entity is paid any compensation, they may not solicit insurance. And if they are to be paid by an insurer or licensed producer, three things must be met: (1) if they refer the business, the insurer or insurance producer’s payment to the referrer does not depend on the completion of an application, nor purchase of insurance; (2) purchase or not is not a factor in any referral compensation; and (3) no solicitation as that term is defined may occur. [52]
Seaworthiness: Free Stuff Is Not Free And Other Perilous Marketing Incentives.
Insurtech’s offering anything at a discount or free related to insurance should take great care and investigate laws related to insurance, including “rebating”, “tying”, and other “illegal inducements”. [53] This exploration should include examining both insurance and non-insurance offerings to determine if there is any discount or gift for anything a Washington customer is enticed to apply or purchase insurance, regardless if the benefit is free/discounted insurance, referral/rebate on insurance, or something else if tied to the transaction(s) that culminate in an accompanying insurance application, or insurance purchase.
A specific example for an Insurtech to explore is “rebating”. Rebating is generally considered to be the payment to an insured (and often someone on their behalf) something for buying insurance. Rebating is illegal in Washington. [54] And rebating comes in many forms, such as sometimes money or gifts, something discounted, or even free insurance. [55] But a rebate or gift for a referral is not the same at “tying”, and should also be closely examined if an Insurtech is embedding its insurance or in some way connecting it to some other transaction. [56]
Mentioned above, once a year, under very limited circumstances a licensed insurance producer may thank someone with a referral gift that may not exceed $100. [57] But this cannot be conditioned on someone applying for or buying insurance.[58]
Summary: Insurtech And The Evergreen State.
Precise care should be taken by an Insurtech and its insurance company and insurance producer partners to comply with Washington laws and regulations related to the sales, solicitation, negotiation, and operations anytime a Washington State insured is involved or the insurable interest touches the Evergreen State. This introduction is just that, a primer and overview inviting deeper investigation to make sure that anytime insurance is published, offered, advertised, marketed, and/or discussed, that every aspect of every part of any interaction and any transaction complies with Washington insurance laws and regulations when any Washington insured is involved in any fashion.