One reason these two terms might be confusing is because a retail agent is often called a broker or a producer. Therefore, it would be reasonable for one to assume a broker fee and a producer fee are one and the same. This, however, is not the case. We break the terms down for you and explain how each apply to you down below.
What is a Broker Fee?
This is a fully earned “placement fee” which the retail agency charges the client for placing/selling the insurance policy. Whether or not a broker charges a broker fee and whatever the amount of that fee ends up being is completely up to the broker. It is important to understand that broker fees are often charged whether a policy premium is financed or not. Therefore, it is fair to say that broker fees have nothing to do with premium financing. In some cases, state laws prohibit a broker from charging a broker fee or limit the amount the broker may charge.
Now that we know that broker fees have nothing to do with premium financing, we might ask, “Why do broker fees appear on the premium finance contract?” The answer is when a broker sells one or more insurance policies and the client elects to finance them, a down payment must be made. This down payment is the amount of money that the borrower must come up with to put a deposit on the insurance and take out a loan for the balance. The borrower must pay for both the insurance policy or policies and the broker fee. Since this fee is typically not financed by the finance company, the down payment must consist of the entire broker fee plus the deposit portion of the premium (usually 15% — 25%). The broker could keep the broker fee and the deposit portion of the premium separate, but for ease, the broker fee is listed on the premium finance contract so that the borrower must look at only one piece of paper to know how much money is required at the onset of the purchase.
As indicated above, the broker fee is typically not financed. Sometimes the broker fee is financed, which would allow for the broker to require a lower down payment from their client. However, this practice is limited because there is no collateral on a financed broker fee. Therefore, if a premium finance company finances $800 of a $1,000 premium and $80 of a $100 broker fee, and the borrower defaults on the loan, the premium finance company, by law, is entitled to the unearned portion of the full $1,000 premium. But no such law exists for the unearned portion of the broker fee. The only way a premium finance company can protect itself when financing a broker fee is to obtain a written agreement from the broker to return a portion of the financed broker fee in the event the borrower stops making payments. In this case, if a premium finance company were to finance broker fees, it can obtain no relief from any state regulatory agency if the broker decides not to return the unearned broker fee. The only thing the finance company could do if a broker reneged on a deal to return broker fees would be to take the broker to court.
What is a Producer Fee, aka, Referral Fee?
A producer fee, or a referral fee, is a fee paid to the retail agency by the premium finance company for referring a customer, preparing the financing documentation and assisting with additional documentation required and sometimes for helping with collection matters. State laws may prohibit or limit the amount of consideration that a premium finance company may pay to an agent. As described above, a broker fee is completely up to the broker in terms of when it is charged and how much it is and often times it is quite arbitrary. Producer fees, on the other hand, are usually calculated using some formula or figure which is established by the premium finance company.
Here are some common formulas used in calculating the producer fee:
1. % of the premium
2. Dollar amount per contract
3. % of the Amount Financed
4. % of the Amount Financed but not less than $_______ per contract
5. Spread in APR (the difference between a “base rate” set by the finance company and the APR that appears on the finance contract)
Many states that allow the charging of a producer fee require that the amount of this fee be clearly disclosed on the premium finance contract.
The insurance industry has a lot of terms that are used and can be difficult to navigate for an insured. One thing an insured wants to be clear about is anything involving fees, so we hope some things have been clarified, at least in this one arena.