Question: At our homeowners association meeting the board told us that they were paying our master insurance policy with one annual payment to the broker. We have just discovered that instead of paying our policy immediately, the broker pays our premiums on a monthly basis. This month he has defaulted on one of the policies.
We are furious that he has full use of our money. Is he entitled to keep the interest on our money? We understand that the broker has a $10,000 bond. Can we collect from his bond for the policy he failed to pay?
Answer: You have described what insurance investigators call "premium diversion," which occurs when the insured pays the broker but the broker never pays the insurance company, according to the California Department of Insurance, or DOI.
More difficult to detect is when a policy is canceled, the insurance company returns part of the premium to the broker and the broker fails to return it to the insured.
However, there is an alternative "diversion" that raises the red flag among insurance investigators. That involves the broker receiving the annual premium from the insured, which must be turned over to the insurance company or, if deposited in a trust account, used to pay insurance premiums on a monthly basis.
"If I am the broker and I know I am going to be short or I am short in my trust account," said Jon Tomashoff, senior staff counsel with DOI, "this is what I would do as often as I could."
Given the average 45-day billing cycle between collection by the broker and the date payment is due the insurance company, the broker figures he has that much time to make up the shortfall; covering that shortfall usually comes from someone else's premium payment, creating a new shortfall.
"If the broker's trust account cannot cover the premium liabilities," Tomashoff added, "that is theft under the Insurance Code."
When a broker promises but fails to make the premium payments your association relied on him to make, that may be fraud. Failure to pay may also be embezzlement or theft.
Interest earned on that money is another trick of the insurance trade. If the seller is an agent, it is the insurance company that approves or disapproves the agent's keeping the interest earned on your money. If the seller is a broker, then only the insured (the homeowners association) can approve his keeping the interest.
Brokers who sell fire and casualty insurance designed to protect multimillion-dollar complexes are required by the Insurance Code to post a $10,000 bond.
This insurance broker's bond is not a panacea because if there are other clients making claims against it, you may never get any of your money back. The DOI Web site (www.insurance.ca.gov) contains information about your broker's surety along with information on how to file a claim against the bond.
Board Member Suspected of Receiving Kickback
Q: The president of our board and the owner of our new management company have been receiving "kickback" money from our insurance agent. The president denies this, but I have learned that the kickbacks are in exchange for making sure the homeowner association insurance policy is underwritten by this particular agent who is friends with the owner of the management company.
Is this ethical? Can we force the agent and management company to return the kickback money to the association or can we reduce our premiums by the amount of the kickbacks?
A: Rebates or kickbacks once illegal were legalized when Proposition 103 was passed in 1988. Rebates do not refer to any payment by an insurance company to the broker or agent but rather to the practice of the agent or broker sharing part of the commission.
"A rebate is money that goes back to the insured while a commission split is a sharing by the broker of his commission with a third party," DOI's Tomashoff said.. "It is when the commission split goes to an individual board member, a management company or a third party that such conduct might be illegal."
Just as the broker may promise the board to pay them a kickback if they place the homeowner association's insurance policies with him, so can the membership demand that the commission splits be used to reduce the costs of the policy or be returned to the homeowners in the form of a reduction in homeowners' monthly fees. Disclosure of the existence of a commission split is required, Tomashoff noted, only when existence is a material fact. If it is material, and a commission split of any size would be to an association, then the disclosure must be made to the insured (the homeowners association).
Homeowners can request that their boards ask their management companies if they are receiving commission splits from the agent or broker who placed the policies.
Stephen Glassman is a writer and an attorney in private practice specializing in corporate and business law. Donie Vanitzian, J.D., is a writer and arbitrator and manages commercial property. Both live in common interest developments. Please send questions to Common Interest Living, P.O. Box 451278, Los Angeles, CA 90045 or e-mail queries to firstname.lastname@example.org.