Broker Disclosure, Legislation and E&O Dominate Latin Agents’ Conference

California Insurance Commissioner John Garamendi’s new proposed agent/broker fiduciary duties regulations are a lot better for the industry than his original regulations, hundreds of agents recently learned at the sixth annual Latin American Agents Association Convention held May 12-15 in Marina del Rey, California. Agents also learned about important legislation affecting the insurance industry and how brokerages can better protect themselves against errors and omissions claims.

Disclosure Obligations
Sanford Michelman, partner in Sherman Oaks, Calif.-based Michelman & Robinson, said that Garamendi’s original broker disclosure regulations proposed in October 2004 were “ridiculous.” “The original regulations were pretty bad, describing that you had a fiduciary obligation to place your client with the best available insurer,” he said. “No one knows what that means.

“They’ve submitted some new proposed regulations that are a lot better,” he continued. “It includes simple disclosures–if you’re going to quote insurance for your clients, you are going to quote from more than just one carrier. They want you to disclose to the consumer what your remuneration is going to be from the carrier–what your commission is going to be, either a dollar amount or a percentage. I don’t see any issue with that. It is something that you owe to the client anyway as a fiduciary.”

Michelman said that the California Department of Insurance sent about 100 letters to insurance companies requesting information about their relationships with producers. Earlier this year, CDI sent letters to producers as well requesting similar information, but agents and brokers are not required to comply with the Department’s request.

“They can no longer just demand that information,” Michelman said. “Some of the producers said, ‘We acknowledge your request, but we’re not going to produce that information because we don’t want to waive our fourth amendment rights.'”

As a result, Michelman said that CDI has issued “a slew of subpoenas” requesting “expansive” information from producers. “They want to know everything about your business as it relates to an insurance company to determine if contingent commissions are bad, if you’re an agent, and if you’re getting compensation in a way that’s not meeting their approval,” he said.

Michelman also spoke to agents about AB 975, legislation that would clarify the definition of broker. “You will be deemed a broker so long as you represent two or more companies,” he said. “I don’t have a problem with that because most of you represent two or more companies. If you only represent one company, how are you actually brokering anything? We are in support of the bill.”

AB 975 became a two-year bill, which means that it will not be heard this legislative session.

Legislation Affecting Agents
State Senator Jackie Speier (D-Hillsborough) discussed legislation related to homeowners insurance.

She spoke about SB 2, a bill that she authored following the devastating 2003 Southern California wildfires. She said that only about 50 percent of the homes destroyed in San Diego have been rebuilt. Under the new law, insurance companies would be required to pay living expenses for two years instead of one for homeowners who lose their houses in fires or other natural disasters.

The bill also states that homeowners would not have to compile an inventory of all of their belongings. They would be reimbursed for 85 percent of the policy limit for personal property damage without compiling an inventory. But they would still need to submit an inventory list if they want to receive 100 percent of the policy limit.

Speier’s bill passed the Senate recently and it now pending approval in the Assembly Insurance Committee.

Deputy Insurance Commissioner Erick Bowman spoke to Latin Agents about the Low Cost Auto Program, a program that came out of legislation sponsored by Senator Speier in 1999 that aims to provide affordable auto insurance to consumers in Los Angeles and San Francisco.

Bowman gave a history of the program, which initially was considered a failure by the Department of Insurance.

“The reason it was a failure was multi-fold,” Bowman said. “It wasn’t much insurance and it wasn’t very helpful or very valuable. It wasn’t promoted in a sensible way. There was no money to promote it. The whole approach to it was bureaucratic.”

Agents were not selling the program, so the department conducted surveys to determine how to improve the system. At 2004’s convention, agents filled out questionnaires and said that the process of selling the LCA program was too time consuming due to paperwork and the commission too low to make selling the program worthwhile.

“So we began an effort to try to fix the program and make it more valuable for consumers and make it more sellable for agents and brokers,” Bowman said. “Our goal is to make it as worthwhile and easy as possible for you to sell the program. I understand that it’s not a great way to enhance the financial success of your individual practice of insurance sales. But it’s extraordinarily important in a county where we have 1.3 million uninsured drivers.”

He explained that the department made structural changes to the program. CDI automated the application so that it can be filled out online, and agents can receive the binding number and date immediately. Also, agents can learn during the application process if a consumer is eligible for the program based on his or her driving record.

Bowman said that there is legislation currently under consideration, SB 20 (Escutia), that would expand the LCA program possibly statewide. The bill would change the maximum number of LCA policies to per person instead of per household. Bowman said this was in recognition of the fact that many low income families have many generations living together in the same household. The bill also would allow consumers to be eligible for the program if the value of their car does not exceed $20,000. Under the legislation, the LCA program would be expanded to include at least six additional counties, including Riverside, San Diego, Fresno, Alameda, Orange County and San Bernardino. Depending on modifications made by legislators, the LCA program could be expanded to all counties in California.

The bill is now in the Assembly Insurance Committee. Bowman expects SB 20 to be signed into law by the governor.

Broker/Agent E&O
Agents were encouraged to limit their errors & omissions risk in a presentation by Brian K. Stewart and Armen Gekchyan of South Pasadena, Calif.-based Collins, Collins, Muir and Stewart LLP. They said that ineffective employee management is the number one cause of claims against brokerages. They said that it is important for employers to limit their risk by having a policies and procedures manual, training employees, supervising employees closely, watching what they sign, and reading E&O policies carefully.

Stewart and Gekchyan urged brokers and agents to examine their policies closely due to retroactive dates, which could result in a period of time when employers are not covered by their E&O policy. They also said to hold meetings and increase communication so upper management is aware of any potential claim that might surface. Failure to disclose knowledge of any potential claim would result in a lack of coverage for that claim, they said.