Says Broker Fee Disclosure May Not Halt Suits

By Daniel Hays

NU Online News Service, May 17, 9:16 a.m. EDT?Despite giving buyers advance disclosure of controversialcontingency fee agreements with insurers, brokers could still facelegal attacks on the basis of state business laws and racketeeringstatutes, according to an attorney who defends members of thebrokerage community.[@@]

While disclosure is a strong defense, it might not be enough toprevent civil actions if some evidence emerges that fee-takingbrokers could have done better by clients, warned Peter Biging, apartner with Nicoletti Hornig Campise Sweeney & Paige in NewYork, discussing the legal framework surrounding the fees, whichare under scrutiny by the New York Attorney General's Office andthe California Insurance Department.

Legal attacks on brokers, he said, could involve arguments thatthey breached their fiduciary duty via misrepresentation because ofa failure to disclose all the facts. "It wouldn't be surprising if[plaintiffs' attorneys] tried to drag in state statutes regardingunfair business practices," he said.

He added that "theoretically, if a scheme to defraud could bealleged, state and federal civil RICO statutes" could be employed,referring to the Racketeering Influenced and Corrupt OrganizationsAct. Indeed, if evidence is uncovered showing that a broker mademailings or telephone calls as part of the scheme, "you can arguemail fraud and wire fraud. This carries treble damages and gets youinto federal court," he said.

With every plaintiff lawyer looking for the next class action,"if you're a major broker, you've got to be concerned because ofthe environment we live in," he added.

Mr. Biging, who specializes in defending brokers and agentsagainst errors and omissions claims, said brokers take the positionthat it is "well-known that these agreements are in place and itdoesn't affect zealous representation."

He said the claim that the fees represent an inherent conflictcould be rebutted if there was a showing that they were disclosed,that clients had a full understanding, and there was no evidencethat fees influenced placement decisions. However, Mr. Biging saidthe extent of disclosure could become an issue if there is evidencethat a broker did not disclose there were better policies for muchless money available to a client.

Theoretically, he said, a comparison of rates for a type ofcoverage could lead to questions that would fuel a legal dispute."Then you have to get into details of policy language," he noted."Maybe [the client] wanted x, y and z" provisions.

"It wouldn't be an easy case to make," he conceded, but notedthat brokers could still be hurt if material surfaced thatattorneys could use to bring a class action and get it certified."With a class action, the risk of enormous recovery leads tosettlements," he added.

Mr. Biging's concerns were echoed by a report from NewYork-based Advisen--a consulting firm that works with the Risk andInsurance Management Society on its "Benchmark Survey"--whichwarned that should the fee probes uncover harm to clients, therecould be a "stampede to the courthouse" to sue brokers.

Jeffrey Wilder--an economist who did a small study for hisdoctorate that compared the behavior of agents in a brokerage whoearned contingency fees and those who did not--found the fees had adefinite impact. However, he noted, his data included only theprice at which a policy was written, and did not include the quotesthat an agent was given before placing the insurance.

Whether an agent knowingly booked policies for customers thatcould have been obtained from a different insurer at a lesserprice, while providing the same coverage in all respects, "I can'ttell from that data," Mr. Wilder said.

Mr. Wilder, who now works as an economist with the U.S. JusticeDepartment Anti-trust Division, wrote in his study that the impactfrom the fees was conditioned by the strength of the agent'srelationship with an account.

On accounts with which agents had a weaker relationship, agentswere found to be far more likely to place new business withinsurers who paid them fees for generating premium volume. "Facedwith many such contracts, an intermediary has strong incentives toconsolidate its sales among its dominant suppliers," Mr. Wilderwrote.

His research suggests, the paper said, that "an agent'sfiduciary duty obligation to the client does not alone suffice toensure an agent acts in the client's best interest."

His paper followed an examination of 7,400 commercial policieswritten in a single Arizona brokerage from 1994 through 2000, andcompared the actions of three brokers who were eligible for thecontingency fees and eight who were not.