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

The Independent Insurance Agents & Brokers of New York has threatened legal action against the New York State Insurance Department over a proposed producer compensation rule it posted yesterday.

According to a letter sent by IIABNY to the department after the rule was published in the New York State Register, the insurance superintendent "does not have legal authority to compel compensation disclosure."

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

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

Explaining the justification for the proposed disclosure regulation, the published rule states, "The proposed regulation is intended to provide a means to address the potential conflict that arises due to the differences in the amount of compensation an insurer pays to its producers in the least invasive manner possible – by requiring that insurance producers make certain disclosures about their role in the insurance transaction and compensation arrangements with insurers to insurance customers."

It notes there is nothing "inherently improper" about incentive-based compensation between an insurer and producer, but that it could lead to a potential conflict if the insurance policy that would earn the producer the greatest compensation is not the most appropriate insurance for the customer.

The posting did not mention that a 2005 New York Attorney General's investigation revealed that some commercial insurance brokers had taken undisclosed payments from insurers to steer clients toward carriers involved in a bid rigging scheme.

IIABNY said it has worked with the department to try to make the rule palatable even though it opposes the idea of mandatory disclosure.

Richard A. Poppa, IIABNY president and chief executive officer, said in a statement, "We ultimately believe this rule is not necessary. However, we have worked with the department on it throughout this year. We continue to seek a reasonable approach that, should a regulation take effect, gives consumers value while minimizing the burdens on producers."

Tim Dodge, director of research and external communications for IIABNY, said the association is specifically opposed to a requirement in the rule stating that a producer must disclose his or her role – whether the producer is legally representing the insurer or buyer in a transaction. He said this requirement adds no value, and could be confusing to the buyer.

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

IIABNY's letter stated, "This provision of the proposed regulation requires that producers evaluate complex legal concepts and then make legal conclusions that even the judiciary has struggled with."

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

Matthew Guilbault, director of government & industry affairs for the Professional Insurance Agents of New York (PIANY) said his association has been working with other agent and carrier groups throughout the process, and he explained that bringing a lawsuit has always been something that was "on the radar screen".

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

Mr. Guilbault said PIANY is still opposed to mandatory disclosure, but he said this draft is "substantially better" than the department's original draft.

One difference he cited was a provision in an earlier draft that would have forced producers to provide a statement to consumers essentially telling them that the producer is influenced by compensation. He said PIANY and others found that "highly offensive."

Mr. Guilbault said he is not sure if PIANY would join IIABNY in a lawsuit if it was filed today, and that the decision would ultimately 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 an attorney and actually drafting a complaint is more complicated.

However, Mr. Guilbault said, PIANY's focus now is on working with the department on the regulation. He said the association has many questions regarding vague and ambiguous terms. For example, he said the definition of "compensation" is overly broad. If a carrier takes a producer to lunch, he wondered, would that qualify as compensation that a producer needs to disclose?

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

He said the department compromised with agents and allowed compensation arrangements such as contingent commissions. "What they get in exchange is a lawsuit," he said.

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

Special Reports /

IIABNY Threatens Suit Over N.Y. Producer Comp Rule

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