WELCOME to 2005-and to the continuing fallout from New YorkAttorney General Eliot Spitzer's investigation of the insuranceindustry. For agents and brokers, a big question in the year aheadwill be to what degree the reaction to the Spitzer investigationaffects their relationships with clients and their ability toobtain contingent compensation from their carriers.

A major step toward answering that question took place shortlybefore the end of December, when the National Association ofInsurance Commissioners approved an amendment to the ProducerLicensing Model Act that would require agents and brokers todisclose more fully their compensation to clients. This was thefourth draft of the amendment, which the NAIC first proposed inNovember, 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 thebottom of this matter as quickly as possible, resolving to developand put in place a tangible action plan for state insuranceregulators,” said Diane Koken, NAIC president and Pennsylvania'sinsurance commissioner. “With passage of this model legislation, weare delivering on that promise.”

(At this point, a major mea culpa is in order. In last month'scolumn, I stated that the NAIC hoped to put its amendment intoeffect by the end of 2004. But all the NAIC can do is proposelegislation; it is up to the individual states to enact it.)

It remains to be seen how the various states will deal with themodel legislation, formally called the Compensation DisclosureAmendment to the Producer Licensing Model Act. The vote on theamendment, which took place during a conference call on Dec. 29,was far from unanimous, with 15 of the 50 NAIC members votingagainst it and two abstaining. Two others were not present. Duringthe course of the conference call, a number of the commissionerssaid they did not feel the amendment's language was strong enough.Hopefully, however, the states eventually will enact uniformlegislation. Otherwise, compliance could become a nightmare, as theCouncil of Insurance Agents & Brokers pointed out in itscomments to the NAIC.

In its action, the NAIC approved one section of the proposedamendment and sent another back to its Executive Task Force onBroker Activities for further consideration. The approved sectionaddresses any producer who “receives any compensation from thecustomer for the placement of insurance or represents the customerwith respect to that placement.” Such a producer (i.e., a typicalbroker) can't accept payment from an insurer unless he or sheobtains the customer's “documented acknowledgement” of the payment.The task force seemed to back away somewhat from its earlierposition, which stated that the acknowledgement must take the formof the client's written consent; no exceptions were mentioned. Theapproved language states that for sales made over the phone or byelectronic means, “consent documented by the producer shall beacceptable,” if the client's written consent can't be reasonablyobtained. The producer also must disclose the amount of thecompensation. In regard to contingent compensation, producers wouldhave to disclose how it will be calculated and provide a reasonableestimate, if possible.

Producers who represent insurers and are not compensated byclients for placing business (i.e., typical agents) would be sparedthe aforementioned requirements but would have a duty to disclosetheir relationships with carriers in certain cases, according tothe NAIC.

The section sent back to the task force for further study would,among other things, affirm that producers have a fiduciaryresponsibility toward their clients. Should this section ultimatelybe approved, let's hope that once again an exception is made fortypical agents. Otherwise, their legal relationship to clientswould change dramatically, creating major new E&O exposures foragents and perhaps conflicts with their legal duties to carrierstoo.

Producer groups cited progress in the evolution of the amendmentbut also called for further clarifications. The IndependentInsurance Agents & Brokers of America, for instance, said thata sharper distinction should be drawn between brokers and agents,that steps should be taken to ensure that consent and disclosurerequirements are reasonable and achievable, and that the amendmentshould not apply to renewal or residual-market business.

“The Big 'I' intends to work closely with those statelegislatures that choose to examine the issue to ensure that theproduct actually enacted into law is effective for consumers andreasonable for those that must comply with its requirements,”Robert A. Rusbuldt, IIABA CEO, stated in commenting on the NAIC'saction. In a separate announcement concerning the IIABA's 2005legislative agenda, Rusbuldt added: “There must be a balancebetween appropriate disclosure by brokers and the protection oflegal incentive compensation”-i.e., contingencies.

MGAs and other intermediaries fared well in the approvedamendment, which states that it will not apply to a producer “whoacts only as an intermediary between an insurer and the customer'sproducer, for example a managing general agent, a sales manager, orwholesale broker.”

“There was no discussion during the entirety of the conferencecall indicating or suggesting that various state bills would omitthe MGA exemption in any future legislation,” Bernd G. Heinze,Esq., executive director of the American Association of ManagingGeneral Agents, said in a letter disseminated to the press afterthe NAIC's vote.

Heinze noted, however, that 15 states voted against adoption ofthe amendment. “Therefore, we need to be vigilant,” he said, toensure the MGA exemption stays in any bill that is ultimatelyenacted into law.