Broker Fee Regulations to Dominate 2005 Legislative Session in California

Three issues will dominate California’s 2005 legislative session–broker fee regulations and fiduciary duties; homeowners insurance, and workers’ compensation, according to IBA West lobbyist John Norwood.

Norwood outlined the upcoming issues for Insurance Journal at IBA West’s Annual Meeting & Installation in Los Angeles Jan. 19. Inevitably, broker fees will be the hottest topic, with the debate already heavily fueled in Sacramento. By now, agents and brokers are familiar with Insurance Commissioner John Garamendi’s proposed regulations introduced in October of 2004, in which he outlined several situations in which agents and brokers would be found in violation of the Insurance Code.

Norwood explained that Garamendi got involved to push the issue forward through the legislature, but won’t succeed in passing the currently proposed regulations. Instead, agent associations and producer groups have come together in efforts to hash out some that everyone can live with.

“The legal authority cited by the commissioner is really very limited in terms of his ability to proactively create new laws, if you will,” IBA West legal counsel Steve Young told IJ. “I think the [Department of Insurance] realized very early that they had rushed together this set of regulations and what they had proposed was just unworkable, because there were so many key provisions that were either too vaguely defined or in some ways, inconsistent with each other.”

Young was part of a recent workshop headed by CDI’s general counsel Gary Cohen, in which industry and consumer representatives came together for a roundtable discussion on the regulations. “There are so many radically different opinions,” Young said.

Young volunteered at the workshop to create a set of proposed regulations on behalf of IBA West that would hopefully receive universal approval by all concerned parties, but was not hopeful that a resolution would be easily reached.

“There is a different assessment, I believe, of the political and legal threat, which agents and brokers are either now facing, or may, in the very short-term future, be facing as a result of these issues,” he said.

“I think there is a different philosophy based on that assessment of what the best way is to proceed. IBA West feels that the status quo is not sufficient. We feel that there is a significant enough ambiguity about a number of key issues that agents and brokers simply don’t have the ability to predict right now exactly what they have to disclose or do in order to avoid liability. We know that agents and brokers right now are being sued and have been sued over defacto agency issues and potentially may be sued to an even greater extent in the future regarding these disclosure issues.”

Young said IBA West believes it would be appropriate for there to be some kind of initial disclosure on a sort of standard form, which would be understandable to consumers, in which the producer would make some sort of initial disclosure that they were acting as an agent or broker, a statement of services to be rendered, and any associated fees to be charged.

“IBA West is on record as supporting transparency by brokers,” Young added. “We appreciate the fact that there is a certain amount of confusion on the part of some personal lines consumers regarding whether the people they are buying insurance from are acting as agents or brokers. I think there is some confusion about the extent of the services that the insurance sales person is providing. For example, are you just selling this policy or are you going to conduct an exhaustive search of the insurance marketplace? Are you conducting a search of the marketplace, or are you recommending, that a particular product is, for lack of a better word, best available?”

Beyond broker fees
Homeowners will also dominate in 2005, Norwood said, fueled by the ongoing debate of underinsurance, a byproduct of the October 2003 wildfires in Southern California. Senator Jackie Speier (D-San Mateo) has already introduced SB 2, which deals with the insured to value issue. “The Commissioner has indicated that he thinks brokers and companies should have a greater duty to essentially estimate the insured to value; he almost wants us to be guarantors for the insured to value,” Norwood said. The Speier bill would set up an approval process by the CDI for computer valuation software.

“Workers’ comp continues to be a headline topic,” Norwood added. “Labor attorneys now want to enact a rate regulation scheme for insurance companies to ensure that all the benefits of workers’ comp reform go back to the policyholders.”

He anticipated continued challenges to the regulations of SB 899. “It’s just an ongoing war. The good news is that the lawyers are upset about SB 899 and the regulations, which means they’re probably working. Hopefully we will have a more competitive market and there will be more players here.”

Norwood also noted that “labor has enunciated a continuing concern about the State Fund paying broker fees and why should they do that, and/or trying to cap what insurers pay brokers for workers’ comp. Their argument is that that’s the only component of workers’ comp that is not regulated. We obviously see it in a different way.”

IBA West installed their new officers at the annual luncheon, and presented the Ramsden-Sullivan Award to former State Compensation Fund President Jack Webb. “For more than 36 years, our recipient served as a productive and animated force within the State Compensation Insurance Fund,” said newly-installed IBA West President Stanley Simpson said.

“Through his leadership, the State Fund grew to a $7 billion, 6,500 employee organization serving more than 250,000 policyholders. Because of his vision and foresight, the State Fund Board of Directors and management came to recognize the benefit of teaming with insurance brokers and independent agents who serve the changing and increasing complexities of California employers. In 1994, he appointed a task force of State Fund executives and specialists to work with IBA West to design and develop a pilot for what then would become the State Fund broker program. This reward is the most prestigious award IBA West can bestow on an individual.”

Installed officers for 2005 included President Stan Simpson of Buckman-Mitchell Inc. in Visalia, California; President-elect Stewart Sawyer of Acordia in Seattle; Secretary-treasurer Paul Bystrowski of Sacramento-based John O. Bronson Company; and Director Andrew Valdivia of Santa Monica-based White & Company Insurance Inc.

Topics California Agencies Legislation Workers' Compensation