Beware of brokerage M&A triggering a licensing issue

If you merge or acquire a new brokerage, make sure your brokers have the proper licences to serve the out-of-province insurance needs of any new clients absorbed into the business, a recent broker regulator decision states.

Insurance Council of B.C. has fined Sussex Insurance Agency $20,000 and its nominee $5,000 for selling out-of-province insurance policies in regions where its brokers did not have a licence to sell the business.

“Council noted that the insurer contracts [with the brokerage] have provisions which warrant that the [brokerage] is properly licensed in all applicable jurisdictions where the insurance business is conducted,” the Insurance Council of B.C. stated in its order, dated Apr. 11.

“As the insurance transactions in question did not adhere to the [brokerage’s] authority granted by the insurer, the [brokerage] allowed policies to be bound that were not authorized. This, in council’s view, poses a risk to the public, as the policies in question would be beyond the authorization of the [brokerage]. Therefore, the policies could be deemed by the insurers to be invalid.”

During the council’s investigation, Sussex said the situation arose out of the brokerage’s prior mergers and acquisitions activity. Some clients absorbed during M&A had asked the brokerage to add policy extensions for out-of-province properties they owned.

“Clients of the agency already had insurance products [in B.C.] and the out-of-province locations added were not due to agency marketing, but because of requests made by the clients to add coverage,” the brokerage’s counsel informed the regulator.

“For each out-of-province transaction in question, the licensee had the equivalent level licence in B.C. required for the sale of each insurance product. For each out-of-province transaction in question, the insurer’s underwriters were aware that the risks being added already had a B.C.-located risk.”

But a sale of property insurance in Ontario triggered a complaint in April 2022 from Ontario’s insurance regulator, the Financial Services Regulatory Authority of Ontario (FSRAO).

“FSRAO evidence suggests [a Sussex broker] sold two property insurance policies for risks located in Ontario,” the Insurance Council of B.C. found. “The email stated the insurance transactions occurred sometime in April 2020. It is alleged at the time the policies were sold that [the Sussex broker] did not have an active insurance licence in Ontario where the property was located.”

When the B.C. regulator followed up with Sussex, it found several other occasions when its brokers were selling out-of-province insurance without being licensed in those areas.

In total, six of the agency’s brokers in B.C. conducted 67 transactions over the course of a decade without realizing they did not have the authority to conduct out-of-province business in Ontario and Alberta, B.C.’s broker regulator found.

In other news: New president for Ontario brokers’ association

Cooperating with the regulator’s investigation, Sussex’s nominee informed the B.C. regulator he was looking into the process for licensing Sussex brokers to handle the business for its clients in Ontario and B.C.

But ultimately, the licensing process turned out to be “too cumbersome for the number of policies involved,” the brokerage later told the regulator. Sussex then took steps to transfer the policies in question to brokers qualified in Alberta and Ontario.

Sussex “contacted an agency located in Calgary, Alberta, which has agents licensed in B.C., Alberta, and Ontario,” as council’s decision states. “With appropriate client consent, the agency from Alberta was provided information from the [brokerage’s] agents for seven customers with properties outside of B.C. This [Calgary-based brokerage] agreed to take over the client files and place the coverage through their agency for those properties.”

Going forward, Sussex advised council it will maintain a policy within the brokerage that “transactions outside of British Columbia will not be bound or brokered unless a licensee holds the requisite licence in the required jurisdiction.”

Council ultimately ruled that Sussex should have done this client needs analysis sooner.

“Council…believes that the [brokerage] had a responsibility when purchasing the books of business to ensure that the clients within that book of business have their needs evaluated and ensure the clients are protected within the transition,” Council’s decision states. “Council concluded that the agency and nominee did not appropriately evaluate the client’s needs and therefore breached the usual practice of dealing with clients.”

Feature image courtesy of iStock.com/Shutter2U