BY SUSAN LINDEN McGREEVY
SINCE LAST FALL, when New York Attorney General (and now candidate for governor) Eliot Spitzer took on the insurance brokerage industry, the world of agents and brokers has changed, permanently — whether it needed to or not. Attorneys general in other states (as well as many federal agencies) and state legislators are determined to "take serious steps" to clean up a problem that may not really exist but will still get them publicity. The idea is that this will help you, the buyer of commercial insurance.
It all started when Mr. Spitzer's office decided to prosecute Marsh & McLennan, the nation's largest insurance broker, for accepting extra compensation (called "contingent commissions") from insurance companies based on the volume of business it placed with those companies. When a diligent law student in Spitzer's office found e-mails that showed that a Marsh broker persuaded other insurers to give high-priced quotes, to make the favored insurer's quote appear lowest, any hope of trying to defend itself vanished and Marsh agreed to an $800 million paymentto the state of New York as a settlement. The press has had a field day.
How this might affect you is not so easy to explain. The first problem is that legally, there is a big difference between an agent and a broker. An agent is the authorized representative of its principal, and an agent has a legal duty of loyalty to its principal, which in this case would be the insurance company. A broker is a middleman, who generally gets paid a fee for negotiating a deal between two or more entities. A broker generally would have a legal duty to the customer who is paying him to find the best deal on insurance for the customer.
The state of New York argued that some brokers had duties to the customers that they breached when they supposedly steered the customers to insurers who would pay the brokers the highest commissions. The biggest national brokers settled with New York, without any finding of guilt, mostly to avoid the unbelievably bad publicity. Now there is a wave — make that a tsunami — of proposed legislation in many states to change the way agents and brokers are paid for their work and how they disclose their payment to their customers.
In some states, the bills introduced in the legislatures call for disclosure only by brokers who accept fees from their customers, because these brokers are in effect serving two masters. In other states, the bills would require disclosure to all customers of agents and brokers (no matter how they are paid) of all forms of compensation. Sometimes, the amount of compensation has to be disclosed and, in others, only the fact that there is compensation and how it is computed.
No consensus exists among the many insurance industry associations on what is best. Some fight for total "transparency" and disclosure while others maintain that there is no reason to disclose anything. The Marsh fiasco was just the result of a few "bad apples."
It doesn't look like much will be accomplished in this legislative year in any case, although many companies are voluntarily changing the way they do business just to avoid being the target of Mr. Spitzer or another zealous prosecutor (or customer).
For the contractor buying insurance ( and no one knows how this would affect the sale of surety bonds, which are lumped in the definition of "insurance" in most states), the most important lesson is probably that you have the right to ask questions of your broker or agent about compensation. Even if there is no law that requires the agent or broker to disclose its payment arrangements, there is no law that prohibits him from telling you, either. As the New York attorney general's office pointed out, a customer has a legitimate interest in knowing whether its insurance agent or broker is getting more money for placing its business with one insurer than another.
Be aware, however, that many of these compensation agreements are complex, and may not help you at all in determining if bias could arise. Most bonuses are year-end, which means that they overlap policy periods. Many are profit sharing, but based on the entire book of business with an agency, making it very difficult to attribute specific dollars to specific contractors (let alone specific contracts).
A customer might insist on getting back its percentage of profit generated by its business, but in many states this would amount to an illegal "rebate" anyway. On the other hand, it could face an argument that it should also be required to reimburse the agency or broker if that customer's claims deprived the agency of its bonus — not what a customer buying insurance would ever expect.
It is probably a good thing for an industry to have to reassess business practices that it has come to take for granted but which may not be such hot ideas when really scrutinized. I do not think, however, that it would be prudent to conclude that the purchase or price of insurance as you know it will change drastically at a result. Nevertheless, if the prominent news coverage of these investigations has kept the Michael Jackson trial off the front page for even a few days, it's been worth it.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/421-4800, e-mail to susan. [email protected]