20-487.02. Minimum standards

A. A controlled insurer shall not accept business from a controlling producer and a controlling producer shall not place business with a controlled insurer unless there is a written contract between the controlling producer and the controlled insurer that specifies the responsibilities of each party, that has been approved by the board of directors of the insurer and that contains the following minimum provisions:

1. The controlled insurer may terminate the contract for cause on written notice to the controlling producer. The controlled insurer shall suspend the authority of the controlling producer to write business during the pendency of any dispute regarding the cause for the termination.

2. The controlling producer shall render accounts to the controlled insurer detailing all material transactions, including information that is necessary to support all commissions, charges and other fees that are received by or owed to the controlling producer.

3. The controlling producer shall remit at least monthly all monies due under the terms of the contract to the controlled insurer. The due date shall be fixed so that the premiums and installments that are collected are to be remitted no later than ninety days after the effective date of any policy placed with the controlled insurer under the contract.

4. The controlling producer shall hold all monies that are collected for the controlled insurer's account in a fiduciary capacity. Pursuant to law, the monies shall be held in one or more appropriately identified bank accounts in banks that are members of the federal reserve system in accordance with any applicable provisions of this title, except that the monies of a controlling producer that is not required to be licensed in this state shall be maintained in compliance with the requirements of the controlling producer's domiciliary jurisdiction.

5. The controlling producer shall maintain separately identifiable records of business written for the controlled insurer.

6. The controlling producer shall not assign the contract in whole or in part.

7. The controlled insurer shall provide the controlling producer with its underwriting standards, rules and procedures and manuals setting forth the rates to be charged and the conditions for the acceptance or rejection of risks. The controlling producer shall adhere to the standards, rules, procedures, rates and conditions. The standards, rules, procedures, rates and conditions shall be the same as those that are applicable to comparable business placed with the controlled insurer by a producer other than the controlling producer. For the purposes of this paragraph, " comparable business" includes the same lines or kinds of insurance, the same kinds of risks, similar policy limits and similar quality of business.

8. The controlling producer's rates and terms for commissions, charges or other fees and the purposes for those charges or fees. The rates of the commissions, charges and other fees shall not be greater than those that are applicable to comparable business placed with the controlled insurer by producers other than controlling producers. For the purposes of this paragraph, " comparable business" includes the same lines or kinds of insurance, the same kinds of risks, similar policy limits and similar quality of business.

9. If on insurance business placed with the insurer the contract provides that the controlling producer shall be compensated based on the insurer's profits on that business, the controlling producer's compensation shall not be determined and paid until at least five years after the premiums on liability insurance are earned and at least one year after the premiums are earned on any other insurance. The commissions shall not be paid until the adequacy of the controlled insurer's reserves on remaining claims has been independently verified pursuant to subsection C.

10. A limit shall be placed on the controlling producer's writing in relation to the controlled insurer's surplus and total writings. The insurer may establish a different limit for each line or subline of business. The controlled insurer shall notify the controlling producer when the applicable limit is approached and shall not accept business from the controlling producer if the limit is reached. If the controlling producer has been notified by the controlled insurer that the limit has been reached, the controlling producer shall not place business with the controlled insurer.

11. The controlling producer may negotiate but may not bind reinsurance on behalf of the controlled insurer on business that the controlling producer places with the controlled insurer, except that the controlling producer may bind a facultative reinsurance contract pursuant to an obligatory facultative agreement if the contract with the controlled insurer contains underwriting guidelines including, for both reinsurance assumed and ceded, a list of reinsurers for which the obligatory agreements are in effect, the coverages and amounts or percentages that may be reinsured and commission schedules.

B. Each controlled insurer shall have an audit committee of the board of directors that is composed of independent directors. The audit committee shall meet annually with management, the insurer's independent certified public accountants and an independent casualty actuary or other independent loss reserve specialist who is acceptable to the director to review the adequacy of the insurer's loss reserves.

C. In addition to any other required loss reserve certification, on April 1 of each year the controlled insurer shall file with the director an opinion of an independent casualty actuary or other independent loss reserve specialist who is acceptable to the director. The opinion shall report loss ratios for each line of business written and shall attest to the adequacy of loss reserves that are established for losses incurred and outstanding as of the end of the year on business placed by the producer.

D. The controlled insurer shall report annually to the director the amount of commissions paid to the producer, the percentage that the amount represents of the net premiums written and comparable amounts and percentages paid to noncontrolling producers for placements of the same kinds of insurance.

E. This section applies if in any calendar year the aggregate amount of gross written premiums on business placed with a controlled insurer by a controlling producer is equal to or greater than five per cent of the admitted assets of the controlled insurer, as reported in the controlled insurer's quarterly statement that is filed by September 30 of the previous year.

F. Notwithstanding subsection E, this section does not apply if both:

1. The controlling producer does all of the following:

(a) Places insurance only with the controlled insurer, the controlled insurer and a member or members of the controlled insurer's holding company system or the controlled insurer's parent, affiliate or subsidiary and the controlling producer receives no compensation based on the amount of premiums written in connection with that insurance.

(b) Accepts insurance placements only from nonaffiliated subproducers and does not accept insurance placements directly from the insured.

2. Except for insurance business written through a residual market facility, the controlled insurer accepts insurance business only from a controlling producer, a producer that is controlled by the controlled insurer or a producer that is a subsidiary of the controlled insurer.