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TITLE 28INSURANCE
PART 1TEXAS DEPARTMENT OF INSURANCE
CHAPTER 19LICENSING AND REGULATION OF INSURANCE PROFESSIONALS
SUBCHAPTER MLICENSING AND REGULATION OF MANAGING GENERAL AGENTS
RULE §19.1204Contract Provisions

(a) This subsection imposes the requirements set out in paragraph (1) and paragraph (2) of this subsection upon contracts between a managing general agent (MGA) and insurers in effect prior to the effective date of this subchapter.

  (1) Oral contract. Every oral contract between an MGA and an insurer in effect prior to the effective date of this subchapter must be reduced to writing and must comply with the Managing General Agents' Licensing Act (Act) and with the provisions of this subchapter within 90 days following the effective date of this subchapter, regardless of the intended renewal date of the contract.

  (2) Written contract. For any written contract between an MGA and an insurer entered into prior to September 1, 1989, the following actions must be taken.

    (A) If the written contract does not address any area which the Act or this subchapter requires the contract to address, the MGA and the insurer must enter into a separate written contract or adopt amendments to the existing contract which address such area and which are in compliance with the Act and this subchapter. The written contract must be entered into or amendments adopted within 90 days from the effective date of this subchapter.

    (B) If the written contract addresses an area which is covered by the Act and this subchapter, and if the contract does not comply with the Act or this subchapter, the written contract must be filed by the MGA with the Agents' Licensing Division of the State Board of Insurance, for information.

    (C) If any written contract entered into prior to September 1, 1989, is amended or changed subsequent to the effective date of the Act, any amendment or change must be in writing and must comply with the Act and this subchapter.

(b) The provisions required by paragraphs (1)-(24) of this subsection are mandatory and must be included in each contract between a managing general agent and an insurer. These provisions are mandated not in order to limit the negotiation process between an MGA and an insurer, but in order to assure that minimum standards are utilized in each contract. Each MGA contract may contain provisions in addition to those listed in this section.

  (1) The contract must state that all amendments and changes to the contract must be in writing and specify the effective date.

  (2) The contract shall specify the party that is responsible for carrying out each particular function. If both parties share responsibility for a particular function, the contract shall specify the extent of each party's responsibility.

  (3) The contract shall include a provision for termination of the contract; may define events of default; may specify cures for events of default; and may define the rights and obligations of parties during a period of default. The contract must state that the insurer may suspend the authority of the MGA during the pendency of any dispute regarding any event of default.

  (4) The contract must specify the frequency with which the MGA must remit funds due to the insurer. In no event may the period of time for the MGA to remit funds to the insurer exceed 90 days from the end of the month in which the coverage is issued.

  (5) The contract must state that, on not less than a monthly basis, the MGA shall submit an account report to the insurer. The report shall detail all transactions as set out in the Insurance Code, Article 21.07-3, §3C(a), and shall include both insurance and reinsurance transactions. The MGA may satisfy this requirement by confirming the insurer's rendering of such account. The account must be received by or confirmed to the insurer not later than 60 days from the close of the month for which business is reported. The insurer must maintain the account on file for at least three years and must make the account available to the commissioner for review.

  (6) The contract must specify whether or not the MGA may appoint or terminate the appointment of agents.

  (7) The contract must state that an MGA may not bind reinsurance or retrocessions on behalf of the insurer, may not commit the insurer to participation in insurance or reinsurance syndicates, and may not collect a payment from a reinsurer or commit the insurer to a claim settlement with a reinsurer without the prior written approval of the insurer. The contract must state that, if prior approval is given, the MGA must promptly forward a report to the insurer.

  (8) The contract must state that the MGA may not assign the contract directly or indirectly in whole or in part without prior written approval of the insurer.

  (9) Where electronic claims files are in existence, the contract must address the timely transmission of the data.

  (10) The contract must include, if such authority is granted, appropriate authority and limitations under which the MGA is to operate, including the maximum annual premium volume, the basis of the rates to be charged, the lines of insurance which may be written, maximum limits of liability, applicable exclusions, territorial limitations, policy cancellation provisions, the maximum policy period, and control of policy issuance. In accordance with the authority and limitations, appropriate underwriting guidelines will be developed by the insurer and MGA and incorporated into the contract by reference.

  (11) The contract shall prohibit the MGA from ceding reinsurance on behalf of the insurer to a company that would not qualify for reinsurance credit under the Insurance Code, Article 3.10 or Article 5.75-1, and the rules of the State Board of Insurance promulgated thereunder. The contract must specify the conditions under which the MGA may place reinsurance and the contract must comply with all provisions of the Insurance Code, including Article 21.07-3, §3B, and the rules of the State Board of Insurance adopted thereunder.

  (12) The contract must provide that the MGA shall not be required to return, as commission or return commission, monies greater than the total commission paid or otherwise payable to the MGA.

  (13) The contract must provide that, if a provision or separate written contract allows for payment of profit sharing between an insurer and an affiliated MGA before all reported claims are closed, including payment of all losses and loss adjustment expenses, then no payment shall be made before:

    (A) one year from the expiration, anniversary, or closing date on which premiums for the period on which profits are to be paid are based for property, inland marine, or auto physical damage; or

    (B) three years from such date for automobile liability; or

    (C) five years from such date for liability other than automobile; or

    (D) two years from such date for any other non-liability lines.

  (14) The contract must provide that, if the MGA has claim settlement authority including the setting of loss reserves, the insurer must review and verify every open reserve for the period on which profits are to be paid prior to calculation and payment of such profit sharing under paragraph (13) of this section.

  (15) The contract must provide that, if the MGA has claim settlement authority including the setting of loss reserves, the insurer may elect to:

    (A) make no payment of the profit sharing under paragraph (13) of this subsection until all reported claims for the period on which profits are to be paid are closed; or

    (B) pay a portion of the profit sharing on the dates shown in paragraph (13) of this subsection and the remaining portion(s) on future anniversaries of such dates until all reported claims for the period on which profits are to be paid are closed.

  (16) The contract must specify that the records to be maintained separately for each insurer as specified in the Insurance Code, Article 21.07-3, §3C(b), include underwriting files and that the separate records of business for each insurer must be maintained for at least five years or until the completion of a financial examination by the insurance department of the state in which the insurer is domiciled, whichever is longer.

  (17) The contract must state whether or not the MGA has claims settlement authority and, if so, must state the maximum dollar amount of such authority, per claim, which in no event shall exceed 1.0% of the insurer's policyholder surplus as of December 31 of the last completed calendar year, or $30,000, whichever is greater.

  (18) If a contract permits the managing general agent to settle claims on behalf of the insurer, the contract shall state that the managing general agent must send a copy of a form reporting to the insurer, within 30 days of determination, that:

    (A) the claim involves a coverage dispute;

    (B) the claim involves a demand in excess of policy limits; or includes allegations of bad faith, violations of the Deceptive Trade Practices Act, or violations of the Insurance Code, Article 21.21.

  (19) The contract must specify the frequency with which the insurer shall cause to be conducted examinations of MGAs with which it is doing business in accordance with the following schedule.

    (A) If the contract is with an MGA that is not an affiliate of the insurer, the contract must specify that the insurer shall cause to be conducted a semiannual examination of such nonaffiliated MGA if such nonaffiliated MGA has done business with the insurer during the previous six months.

    (B) If the contract is with an MGA that is an affiliate of the insurer, the contract must specify that the insurer shall cause to be conducted an annual examination of such affiliated MGA with which the insurer had done business during the previous year.

    (C) If the insurer's aggregate premium volume increases by 30% in any 30-day period, the insurer shall cause to be conducted an examination within 90 days of any Texas MGA that writes more than 20% of the insurer's volume and that has experienced an increase of 20% in premium volume during the same 30-day period.

  (20) The contract must specify that the examinations required in paragraph (19) of this subsection must adequately provide the commissioner with the information required under subparagraphs (A)-(E) of this paragraph; must be made available to the commissioner for review; must remain on file with the insurer for at least three years; and must, at a minimum, contain the following information required by subparagraphs (A)-(E) of this paragraph:

    (A) claims procedures;

    (B) timeliness of claims payments; i.e., lag time between date claim is reported and date claim is paid;

    (C) timeliness of premium reporting and collection;

    (D) compliance with underwriting guidelines as developed in accordance with paragraph (10) of this subsection; and

    (E) reconciliation of policy inventory.

  (21) The contract must state that the MGA must notify the insurer in writing within 30 days if there is a change in:

    (A) ownership of 10% or more of the outstanding stock of the MGA;

    (B) any principal officer of the MGA; or

    (C) any director of the MGA.

  (22) The contract shall not allow an MGA to offset balances due under any contract with any offset due under any other contract.

  (23) The contract must state that the MGA holds all funds of the insurer in a fiduciary capacity.

  (24) The contract must state that the insurer retains final authority over disputes concerning claims settlement and setting of loss reserves.

(c) The provisions of paragraph (1) and paragraph (2) of this subsection are permissive and may be included in a contract between a managing general agent and an insurer. These two permissive contract terms are included in order to clarify that these terms are acceptable as written in this subsection. This subsection is not intended to preclude the inclusion of other provisions in the contract in addition to those listed in this subsection.

  (1) The contract may authorize the MGA to accept premiums net of commissions due to agents and to retain from the premiums, as received, commissions due the MGA as specified in the contract.

  (2) The contract may authorize an MGA to pay reinsurance premiums if the MGA is not an affiliate, as defined in this subchapter, of the insurer or of the reinsurer.

(d) A written contract between an MGA and an insurer which provides that the MGA may not place business with the insurer need not comply with the requirements of this section.


Source Note: The provisions of this §19.1204 adopted to be effective October 24, 1991, 16 TexReg 5776.

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