Contingency Commissions and the Future of California Agents & Brokers

How the Spitzer-led investigation against broker fees inspired solutions to California’s “problems”

Over the past several months, there have been numerous explanations, press releases and position papers crafted to provide many different and disparate points of view regarding the fiduciary duty of brokers and the future of contingent commissions in California. Here is a summary of what has transpired from the American Agents Alliance perspective.

New York: The beginning
The now well-known investigation of insurance brokerage giant Marsh McLennan by New York State Attorney General Eliot Spitzer spawned a national avalanche of similar investigations in other states. Spitzer alleged that Marsh McLennan steered customers to major insurance companies that made “back door” payments, or contingent commissions, to Marsh. According to Spitzer, the scheme involved fabrication of bids by Marsh to deceive clients into believing they were obtaining the lowest priced policies.

Marsh McLennan has since established an $850 million fund to compensate clients, as per an agreement with the State Attorney General and the California Department of Insurance that resolves the actions that were commenced against the brokerage. Under the terms of the agreement, the company neither admits nor denies the allegations in complaints filed by the AG and the CDI.

Garamendi proposes fiduciary regs
California Insurance Commissioner John Garamendi, assuming similar programs may exist in California, responded by proposing new regulations which would require producers to disclose all potential income to clients and redefine the broker fiduciary responsibilities by including another component requiring producers provide clients with the “best available insurer.”

This adds a dimension that is difficult, if not impossible, to implement and enforce. Additionally, it conceivably places a broker/agent into an unanticipated legal arena. These proposed regulations have been widely criticized, and are vociferously opposed by the Alliance and a coalition of industry trade groups.

In an Oct. 20, 2004 press release that accompanied the announcement of his proposed regulations, Garamendi indicated that it has become necessary to clarify and tighten laws prohibiting alleged secret practices currently at the center of the national controversy. He indicated that alleged secret broker commissions are a serious problem that betrays the public trust, noting that as far back as March 2004, he initiated an investigation to assess the extent of a complaint from a consumer group critical of incentive commission practices and whether regulatory or legal action was required. No specifics or justifications of the proposed regulations have been rendered.

Historically, there have been few, if any, disciplinary or civil actions involving receipt by brokers of commissions or contingent commissions or matters involving conflict of interest in broker compensation arrangements.

Association “coalition” challenges CDI
Shortly after Garamendi announced his proposed regulations, the Alliance, working with the Western Insurance Agents Association, issued a position paper challenging the Commissioner’s authority to implement the proposed regulations, submitting that regulations must be consistent–and not in conflict–with authorizing statutes, and must be reasonably necessary to further the purposes of existing statutes.

In the past, issues such as this have been met by a somewhat fractured industry line, with trade groups protecting their own turf and challenging the CDIin varying degrees, depending on their individual agendas. The Alliance believes this is an issue in which the industry as a whole has much common ground, and that a strong voice of opposition would best serve interests across the board. Working with other associations representing producers and carriers, a coalition opposing the regulations was formed. With few exceptions, this group presented a united front at the public hearings on the proposed regulations.

Letters of inquiry are sent out
Prior to the public hearing on the proposed regulations, specifically on Dec. 21, 2004, the CDIbegan sending out Letters of Inquiry to all domestic insurers seeking information on compensation agreements between individual producers and their respective carriers. The purpose of this inquiry, we believe, is for the CDI to uncover any inappropriate solicitation activities by producers.

Attorney Bob Hogeboom, representing the Alliance and WIAA, sent a letter to CDI General Counsel Gary Cohen indicating that the Letter of Inquiry is without legal foundation. He further asserted that, based on allegations made by the Commissioner in a recent case and in the Statement of Reasons which support the Commissioner’s Broker Fiduciary Duties regulations, the CDI has already declared that contingent agreements without disclosures are, per se, illegal. Hogeboom asked that the Letter of Inquiry be withdrawn as a misleading document without authority.

Responding to Hogeboom’s letter, Cohen agreed that the Letter of Inquiry was without statutory authority, but he noted that the CDI would subpoena all information not voluntarily submitted by insurers. Apparently, a majority of insurers complied with the request for information from the CDI.

January public hearing and workshop
At the Jan. 6, 2005 public hearings, representatives from the coalition associations spoke against the proposed regulations, with Executive Director Ken Nigohosian and Hogeboom representing the Alliance. Hogeboom also represented WIAA at the hearing. Interestingly (and tellingly), the CDI had already set up a workshop for all interested parties to try and find a resolution to concerns over the proposed regulations. This suggested to us that the CDI was ready for overwhelming opposition and prepared for the second-phase of the debate.

During the workshop on Jan. 13, 2005, the CDI attempted a “divide and conquer” strategy to split the coalition through exemptions by exploiting individual agendas. Unfortunately, the strategy worked to a certain degree. Again, the Alliance, offering to work with the CDI, requested that it offer evidence of broker/agent misconduct. Unfortunately, the CDI offered only hypothetical examples and referenced problems in other jurisdictions. The Alliance is still working closely with the other trade associations with the expectation that we can successfully defeat the proposed regulations, as well as equally destructive regulations that could be proposed in the future.

Recently, a group which has been described as California’s top 200 brokers received letters of inquiry, similar to those received by insurance companies, which state that “significant allegations related to ‘bid rigging’ and inappropriate ‘steering’ by certain insurance brokers in the placement of business have been raised in recent days as a result of legal proceedings instituted in the State of New York.”

Because of a concern over ensuring a fair and competitive marketplace here, the CDI stated it is “undertaking a review of various aspects of the relationship between California licensed producers acting as brokers and insurance companies, as we are determined to do everything in our power to assess whether and to what extent these alleged improper practices may have affected consumers.”

Trying to find a non-existent problem
The letter of inquiry includes four pages of questions asking for, among other things, in-depth descriptions of company relationships and compensation arrangements with said companies, information on legal situations regarding broker compensation arrangements, and internal controls to prevent inappropriate solicitation activities.

The letter also asks for extensive documentation–24 categories–to be forwarded, along with answers to the questions mentioned above, to the CDI.

The Alliance believes the letters of inquiry are a transparent attempt by the CDI to look for evidence of a crisis to justify the proposed regulations.

The fact is that the CDI’s arguments for the proposed regulations have been all over the place; first railing against alleged “steering” by personal lines agents and brokers, then arguing for expanded broker fiduciary duties, including increased compensation disclosure, and most recently with the current attack on contingency commissions.

What’s next?
Now, the proposed regulations are in limbo as the CDIcontinues its fishing expedition, threatening to subpoena producers who do not provide requested information to the CDIby its deadline. Recently, Garamendi apparently agreed to drop the “best available insurer” language. However, several new producer mandates, including a significant expansion of required disclosures, could be added to the proposed regulations.

Also, legislation which “would state the intent of the Legislature to ensure that insurance agents and brokers disclose any financial incentive they receive for selling certain insurance products and steering business to specific companies.” This disturbing “legislative intent” bill, authored by state Senator Joseph Dunn (D-Garden Grove), was introduced with the backing of the CDI and is a likely legislative vessel for the proposed regulations should they fail to pass muster in the regulatory arena.

The Alliance, as well as other associations, have attorneys reviewing the legality of the CDI’s letters of inquiry, specifically on whether Garamendi has the statutory authority to compel producers to provide the material, much of it proprietary and non-public, asked for in the letters.

If you are a broker/agent member of the Alliance who has received a letter of inquiry from the CDI, we would suggest reviewing your legal options and notify the Alliance of your inquiry status.

After a nearly quarter century career on the insurer side of the industry, most notably with Safeco Insurance, Ken Nigohosian joined the American Agents Alliance as executive director in 2004. Don Lukenbill has been the American Agents Alliance’s communications director since 1995. Attorney Robert Hogeboom from the law offices of Barger & Wolen also contributed to the article.

Topics California Trends Carriers New York Agencies Legislation