Another Broker Defends Contingency Fees

By Mark E. Ruquet

NU Online News Service, May 4, 11:55 a.m.EDT?The head of U.S.I. Holdings Corporation, defending thecontroversial contingency fees insurers pay his firm and otherbrokers, said the arrangements provide leverage to get the bestdeal for clients.[@@]

Critics, whose complaints have led to several officialinquiries, including one by New York Attorney General EliotSpitzer, contend the practice creates a conflict of interest thatworks against broker customers.

David L. Eslick, chairman, president and chief executive officerfor the Briarcliff Manor, N.Y.-based U.S.I., said the fees are along-standing practice, and "what many people are missing is that[the fee arrangement] recognizes the relationship between the agentand the insurer and the agent's roles and responsibility as thefield underwriter for the insurance company, including bindingauthority and those sort of items."

Mr. Eslick added, "So it is an item that puts us in the sameposition with the insurance company, focusing on making sure thatbusiness is profitable.

"And, by the way, that is critically important to our clientsbecause, if the business we are placing with the carriers isprofitable, that gives us great leverage working with thosecarriers, and exercising to the best extent possible with ourclients, in getting them (the client) the best deals."

Mr. Eslick's remarks came in response to a question during ananalyst's conference call reviewing the firm's improvedfirst-quarter results. Company performance during the period wasdriven in part by higher contingent income, which rose 42 percentto $13.5 million.

Mr. Eslick said U.S.I. has not been among the brokers subpoenaedby the New York Attorney General's Office and has not beencontacted by that agency. He noted that contingency fees are fullydisclosed by the firm in its annual report and to clients.

"We think it is an important disclosure and we make sure it isproperly disclosed to our customers," he said.

Marsh, Aon, Willis and Kaye Associates, a subsidiary ofChicago-based Hub International Ltd., said they were subpoenaed byMr. Spitzer's office requesting documents related to contingencyfees. They have defended the fees as long-standing practice.

Last Thursday Joe Plumeri, the head of Willis Group, said aninvestigation into contingency fees is not a "big deal" forinsurance brokers because the fees are not a significant part ofearnings and there are no compliance issues.

The Washington Legal Foundation, a nonprofit law and policycenter in Washington, D.C., which characterizes itself as afree-enterprise advocate, wrote Mr. Spitzer, New York InsuranceSuperintendent Gregory V. Serio and California InsuranceCommissioner John Garamendi in February calling for aninvestigation of the fees, which it said "infringe on businesses'right to compete in a free marketplace."

Contingency fees previously came under fire in the late 1990s.The payment arrangements with insurance companies are in additionto commissions that brokers receive. The fees are based upon theamount of business or the quality of business that a broker placeswith an individual company.

In 1998, the activity was the subject of a letter from the NewYork Insurance Department warning brokers that undisclosedcontingency fees might be illegal. After pressure from commercialbuyers via the Risk and Insurance Management Society, Chicago-basedAon, New York-based Marsh and London-based Willis all agreed todisclose fees. A California public interest lawsuit in 2000 thatwas filed against the three brokers over the fees was quietlysettled out of court.