NU Online News Service, Dec. 3, 12:48 p.m.EST

The Independent Insurance Agents & Brokers of New York hasthreatened legal action against the New York State InsuranceDepartment over a proposed producer compensation rule it postedyesterday.

According to a letter sent by IIABNY to the department after therule was published in the New York State Register, the insurancesuperintendent "does not have legal authority to compelcompensation disclosure."

IIABNY also argued that there are "serious problems with theproposal's extent."

Matthew Gaul, special counsel for the department said, "We aresurprised that what we viewed as least controversial aspect of thedisclosure has prompted a threat of alawsuit — the requirement thatagents and brokers clearly explain who they rep in a transaction.For years the Big I [IIABNY's national association] members havesaid they are the "Trusted Choice" for consumers; what theyapparently don't want to tell their customers is that in mosttransactions, they represent the insurance company."

Explaining the justification for the proposed disclosureregulation, the published rule states, "The proposed regulation isintended to provide a means to address the potential conflict thatarises due to the differences in the amount of compensation aninsurer pays to its producers in the least invasive manner possible– by requiring that insurance producers make certain disclosuresabout their role in the insurance transaction and compensationarrangements with insurers to insurance customers."

It notes there is nothing "inherently improper" aboutincentive-based compensation between an insurer and producer, butthat it could lead to a potential conflict if the insurance policythat would earn the producer the greatest compensation is not themost appropriate insurance for the customer.

The posting did not mention that a 2005 New York AttorneyGeneral's investigation revealed that some commercial insurancebrokers had taken undisclosed payments from insurers to steerclients toward carriers involved in a bid rigging scheme.

IIABNY said it has worked with the department to try to make therule palatable even though it opposes the idea of mandatorydisclosure.

Richard A. Poppa, IIABNY president and chief executive officer,said in a statement, "We ultimately believe this rule is notnecessary. However, we have worked with the department on itthroughout this year. We continue to seek a reasonable approachthat, should a regulation take effect, gives consumers value whileminimizing the burdens on producers."

Tim Dodge, director of research and external communications forIIABNY, said the association is specifically opposed to arequirement in the rule stating that a producer must disclose hisor her role – whether the producer is legally representing theinsurer or buyer in a transaction. He said this requirement adds novalue, and could be confusing to the buyer.

Furthermore, he said a producer often does not know if he or shewill be acting as an agent or broker for all lines of coverage in agiven transaction.

IIABNY's letter stated, "This provision of the proposedregulation requires that producers evaluate complex legal conceptsand then make legal conclusions that even the judiciary hasstruggled with."

"Unfortunately," the letter concluded, "unless the proposedregulation is withdrawn, we will have no alternative but to seekredress in the court system to challenge the proposed regulationand any efforts to adopt a similar regulation."

Matthew Guilbault, director of government & industry affairsfor the Professional Insurance Agents of New York (PIANY) said hisassociation has been working with other agent and carrier groupsthroughout the process, and he explained that bringing a lawsuithas always been something that was "on the radar screen".

For PIANY to initiate such an action, tho he said the departmentwould have to unfairly single out independent agents for disclosurerequirements, which it has not done in its published draft.

Mr. Guilbault said PIANY is still opposed to mandatorydisclosure, but he said this draft is "substantially better" thanthe department's original draft.

One difference he cited was a provision in an earlier draft thatwould have forced producers to provide a statement to consumersessentially telling them that the producer is influenced bycompensation. He said PIANY and others found that "highlyoffensive."

Mr. Guilbault said he is not sure if PIANY would join IIABNY ina lawsuit if it was filed today, and that the decision wouldultimately rest with PIANY's board.

The crafting of the lawsuit would be one main factor, he noted,mentioning that threatening a suit is easy, but sitting with anattorney and actually drafting a complaint is more complicated.

However, Mr. Guilbault said, PIANY's focus now is on workingwith the department on the regulation. He said the association hasmany questions regarding vague and ambiguous terms. For example, hesaid the definition of "compensation" is overly broad. If a carriertakes a producer to lunch, he wondered, would that qualify ascompensation that a producer needs to disclose?

Birny Birnbaum, executive director of the Center for EconomicJustice in Austin, Texas, called the threat of legal action"unfortunate," and said he is struck by the fact that IIABNYbelieves the rule is not needed.

He said the department compromised with agents and allowedcompensation arrangements such as contingent commissions. "Whatthey get in exchange is a lawsuit," he said.

The proposed regulation can be viewed athttp://www.dos.state.ny.us/info/register/2009/dec2/pdfs/rules.pdf#page=16