WELCOME to 2005-and to the continuing fallout from New York Attorney General Eliot Spitzer's investigation of the insurance industry. For agents and brokers, a big question in the year ahead will be to what degree the reaction to the Spitzer investigation affects their relationships with clients and their ability to obtain contingent compensation from their carriers.
A major step toward answering that question took place shortly before the end of December, when the National Association of Insurance Commissioners approved an amendment to the Producer Licensing Model Act that would require agents and brokers to disclose more fully their compensation to clients. This was the fourth draft of the amendment, which the NAIC first proposed in November, and it reflected input NAIC solicited from carriers, producer organizations and other parties.
"We made a promise to consumers and (the) industry to get to the bottom of this matter as quickly as possible, resolving to develop and put in place a tangible action plan for state insurance regulators," said Diane Koken, NAIC president and Pennsylvania's insurance commissioner. "With passage of this model legislation, we are delivering on that promise."
(At this point, a major mea culpa is in order. In last month's column, I stated that the NAIC hoped to put its amendment into effect by the end of 2004. But all the NAIC can do is propose legislation; it is up to the individual states to enact it.)
It remains to be seen how the various states will deal with the model legislation, formally called the Compensation Disclosure Amendment to the Producer Licensing Model Act. The vote on the amendment, which took place during a conference call on Dec. 29, was far from unanimous, with 15 of the 50 NAIC members voting against it and two abstaining. Two others were not present. During the course of the conference call, a number of the commissioners said they did not feel the amendment's language was strong enough. Hopefully, however, the states eventually will enact uniform legislation. Otherwise, compliance could become a nightmare, as the Council of Insurance Agents & Brokers pointed out in its comments to the NAIC.
In its action, the NAIC approved one section of the proposed amendment and sent another back to its Executive Task Force on Broker Activities for further consideration. The approved section addresses any producer who "receives any compensation from the customer for the placement of insurance or represents the customer with respect to that placement." Such a producer (i.e., a typical broker) can't accept payment from an insurer unless he or she obtains the customer's "documented acknowledgement" of the payment. The task force seemed to back away somewhat from its earlier position, which stated that the acknowledgement must take the form of the client's written consent; no exceptions were mentioned. The approved language states that for sales made over the phone or by electronic means, "consent documented by the producer shall be acceptable," if the client's written consent can't be reasonably obtained. The producer also must disclose the amount of the compensation. In regard to contingent compensation, producers would have to disclose how it will be calculated and provide a reasonable estimate, if possible.
Producers who represent insurers and are not compensated by clients for placing business (i.e., typical agents) would be spared the aforementioned requirements but would have a duty to disclose their relationships with carriers in certain cases, according to the NAIC.
The section sent back to the task force for further study would, among other things, affirm that producers have a fiduciary responsibility toward their clients. Should this section ultimately be approved, let's hope that once again an exception is made for typical agents. Otherwise, their legal relationship to clients would change dramatically, creating major new E&O exposures for agents and perhaps conflicts with their legal duties to carriers too.
Producer groups cited progress in the evolution of the amendment but also called for further clarifications. The Independent Insurance Agents & Brokers of America, for instance, said that a sharper distinction should be drawn between brokers and agents, that steps should be taken to ensure that consent and disclosure requirements are reasonable and achievable, and that the amendment should not apply to renewal or residual-market business.
"The Big 'I' intends to work closely with those state legislatures that choose to examine the issue to ensure that the product actually enacted into law is effective for consumers and reasonable for those that must comply with its requirements," Robert A. Rusbuldt, IIABA CEO, stated in commenting on the NAIC's action. In a separate announcement concerning the IIABA's 2005 legislative agenda, Rusbuldt added: "There must be a balance between appropriate disclosure by brokers and the protection of legal incentive compensation"-i.e., contingencies.
MGAs and other intermediaries fared well in the approved amendment, which states that it will not apply to a producer "who acts only as an intermediary between an insurer and the customer's producer, for example a managing general agent, a sales manager, or wholesale broker."
"There was no discussion during the entirety of the conference call indicating or suggesting that various state bills would omit the MGA exemption in any future legislation," Bernd G. Heinze, Esq., executive director of the American Association of Managing General Agents, said in a letter disseminated to the press after the NAIC's vote.
Heinze noted, however, that 15 states voted against adoption of the amendment. "Therefore, we need to be vigilant," he said, to ensure the MGA exemption stays in any bill that is ultimately enacted into law.
