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Spitzer's can of worms wriggles on Mega brokers' misdeeds, now punished, open door to unwarranted interference in commission By Emanuel Levy It all started with a second “tip” in April 2004, sometime after New York Attorney General Eliot Spitzer’s office apparently failed to act on the first one that had come from the Washington Legal Foundation, a conservative organization that specializes in controversial insurance litigation as an “Advocate for Freedom and Justice.” The second tip was from an anonymous source, but it suggested obliquely that because the AG’s office had made some inquiries at Marsh & McLennan, there were ongoing efforts there to “obfuscate reality.” Excerpts from that two-page typed letter from the unidentified source are quoted in a recently published book, by Brooke A. Masters, a Washington Post staff writer. It’s actually a biography of the attorney general, titled Spoiling For A Fight, The Rise of Eliot Spitzer, and includes well-researched details on how the investigation tore away the veil of deception in a scam involving insurance premiums. That tip galvanized the attorney general into launching the investigation that uncovered the extent of the scandalous “bid rigging” activities of a bunch of conspirators within the ranks of the few remaining mega brokers and some compliant insurers. As everyone was aware from his previous forays into the securities business, Spitzer was not deterred by power, obfuscation or any other denial (stonewalling) tactics, including the dismissive assertion that he did not understand the insurance business. He unleashed his staff of investigators, and they came up with damning e-mails and lots of quid pro quos to put the whole cabal into perspective. And it could not be that the insurer executives were not aware of what was going down. In her book about Spitzer, author Masters describes an incident in which AG staff members discovered a memo in the files of Munich American Risk Partners. In it, a vice president cited a comment by a regional underwriting manager that said: “This idea of ‘throwing the quote’ by quoting artificially high numbers in some predetermined arrangement for us to lose is repugnant to me, not so much because I hate to lose, but because it is basically dishonest.” Too bad there were so few like him. How Spitzer defined “contingent commissions” Unfortunately, in probing this dishonest bid-for-cash, Spitzer accepted the nomenclature “contingent commission” as the money paid to the megas for their manipulative schemes. That might not have mattered, except that it brought into the investigative arena the entire agency/brokerage marketplace and the legitimacy of contingent commissions. That was an unwarranted and unfortunate circumstance. The mega brokerage system and the Main Street agent/broker system are largely unrelated marketing entities, not only in size but also in representation. Even Spitzer grudgingly recognized the difference and modified his adversary stance on contingent commissions, telling a 2004 congressional oversight hearing that contingent commissions “in and of themselves are not improper.” But being a prosecutor and without an understanding of the long and honorable service to the public of Main Street agents and brokers, he later recanted and said contingent commissions were inherently harmful and should always be prohibited on an industry-wide basis. He was right the first time, and if he had instructed his staff in the beginning to understand the structure and manner of reimbursement of the Main Street agent/broker, rather than just lumping everything together, the consequences would not be as dire as they are becoming for Main Street brokers. The megas have, to some extent, softened their awful behavior, having paid fines and agreed to well over a billion dollars in restitutions to policyholders. They have even won partial restoration of their right to commissions from insurers in addition to their customer fees, under some newly defined rules relating to managing general agent services. But, ironically, the Main Street brokers/agents, who were not in the least involved in the rip-off distortions, now face regulatory overkill because some state attorneys general, some insurance departments and the National Association of Insurance Commissioners (NAIC), who piggybacked onto the successful Spitzer crime and punishment saga, are instituting onerous and bizarre programs they are merchandising as providing transparency for consumers, vis a vis Main Street producer earnings. It is true that the NAIC, various state regulators and a variety of state attorneys general have been on the scene since almost immediately after the Spitzer probe was first launched and began to get media attention. That goes back to 2004. The NAIC had begun looking into the commission issue late in the year and, through its Executive Task Force on Broker Activities, sought industry comments on a proposed Broker Disclosure Amendment to the Producer Licensing Model Act. It did not appear to make a distinction between the mega brokers, which earn income through fees charged to customers and the Main Street agents/brokers who are paid commissions solely under contractual terms by the insurers who underwrite the coverage. Trickle-down effect Clearly, the door had been flung open, when it never should have been, because relating mega broker operations with Main Street agents and brokers, is like comparing apples and oranges. The insurance regulators, particularly, should have recognized that distinction immediately, even if the attorneys general were not aware or didn’t care about the distortion. Actually, to this observer, the AGs grabbed hold of the Spitzer shirt-tails, as a political device to show their state constituents that they were players in the insurance bashing game, never letting on that they were shooting at the wrong targets. And as an example of its need to catch up, and soften the insurance regulators’ trumping by Spitzer, the NAIC made a headlong dash into this non-existent regulatory problem of commissions. In the statement it released January 31, 2005, following the Spitzer settlement agreement with Marsh & McLennan Companies, NAIC said that it “moved quickly as a unified force of state regulators to address the issue and protect consumer interests by immediately forming an Executive Task Force on Broker Activities, which initiated a three-pronged action plan designed to engage consumers, provide a solution, co-ordinate multi-state inquiries and leverage state expertise and resources.” To its credit it did refer to “top brokers” but that was insufficient to indicate that the problem was triggered by the three mega brokers and did not include Main Street agents and brokers. There are, of course, brokers with large volumes that receive both commissions and fees that work under transaction-specific disclosure obligations in order to provide operational transparency, even though they don’t fit into mega status and were not involved in any way in the fixed bidding scandal. Attempts to remedy may make things worse Evidently what developed out of the NAIC initiative was insufficient to satisfy a wide range of attorneys general who have obtained from Zurich Insurers, effective on or about March 20, 2006, a so-called multi-state regulatory agreement that includes commission transparency. Involved in this multi-state agreement with the insurer are the attorneys general of: California, Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania, Texas, Virginia and West Virginia. Aligned with the AGs are the insurance departments of Florida and California. There is also a three-state AG agreement with the insurer that includes New York, Connecticut and Illinois, with the New York Insurance Department party to it. The agreement has not become effective, it appears, because litigation against the insurer is now pending in a federal district court in New Jersey that seeks abrogation of those aspects of the agreement between Zurich and the AGs, that would be injurious to the public and to insurance agents and brokers. It is being brought by members of a class of policyholders of Zurich, to require the insurer to abrogate the agreement as illegal and anti-consumer. The National Association of Professional Insurance Agents (PIA National), which considers aspects of the agreement as inimical to the interests of brokers and agents generally, and to its own members specifically, sought to join in the drafting of a Mandatory Disclosure Statement inherent in the agreement, but was rebuffed. Later, as an alternative, it joined the lawsuit against the agreement, filing in September 2006, an amicus curiae (friend of the court) brief which challenges the legal authority of the AGs to set rules on commission relationships. Two weeks later, the Independent Insurance Agents and Brokers of America (IIABA) filed its own amicus curiae brief on the matter. The PIA National brief—the product of three major law firms—attacks the essence of the Zurich agreement on several levels, including that it introduces legal conflict and confusion of insurance buyers’ rights by imposing a defective disclosure notice and threatening the livelihood of PIA members and all other brokers and agents. While this current matter implicates only Zurich, the presumption is that many insurers will be seduced into similar agreements, which may end up, if not upended, with a new layer of insurance regulators without legal portfolio and ruling by default. The agreement mandates that brokers and agents of the insurer provide a “Mandatory Disclosure Statement to their policyholders.” The agreement also requires Zurich to contact through its agents, each customer to obtain consent for virtually any matter affecting an insurance placement. The demand is so broad that it refers to each “transaction.” I spoke with PIA National Vice President/Treasurer Kenneth R. Auerbach (Esq.), an independent agent in Eatontown, New Jersey, who is managing director and general counsel of E&K Insurance, a firm established in 1930. He is a past president of the PIA of New Jersey. He said that disclosure statements have been in use by other carriers, but that the Zurich disclosure device is vague and does not say what constitutes consumer “consent,” nor does it set limits on the parameters of “transaction” for which customer consent is required. This means, he said, that the process may relate to every phone call, every amendment of a policy where coverage may be added and commission revised. Auerbach said the rate regulatory structure has always included overall monitoring of commissions as part of company filings. He said rates are based on company filings, and he pointed out that there is no way to relate contingency earnings to any specific policy purchase because so many specific contract considerations go into the calculation of what each producer earns as a contingency commission at the end of the year. Trying to explain this to an individual policyholder, whose business may be limited to one homeowners policy and auto coverage, not only would be fruitless but also would be counterproductive. In addition, making disclosures mandatory, Auerbach agreed, seems to mean that the customer would have the right to object to any aspect of the commission arrangement. Otherwise, “mandatory” would mean that there was no significance to any objection. The concept makes no sense, but it could create disturbing consequences. Nevertheless, it is being foisted on professional agents and brokers who have served the public faithfully. Auerbach said in his experience no insured has ever asked how much he earned on a policy. The danger is that this Zurich agreement is probably being planned as a model for other companies. Played out, it would be destructive, endangering the protection of the public interest. The battle to thwart this development needs the full support of every segment of the insurance business. State insurance regulators and legislative bodies must be made to understand that state legal officers are assuming legislative and regulatory prerogatives that are not needed and that are outside the realm of good sense. * The author |
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