Four consumer groups are blasting the Independent InsuranceAgents and Brokers of New York for their threat to sue the stateinsurance department over proposed compensation disclosureregulations.

The Center for Economic Justice, the Consumer Federation ofAmerica, the New York Public Interest Research Group and ConsumersUnion released a statement admonishing the agent association forthreatening to take legal action when the department is attemptinga good-faith effort to make producer compensation arrangementstransparent.

The department has published proposed Regulation No. 194, whichsets out rules for agents and brokers to disclose to their clientstheir compensation arrangements with insurers and explain theirrelationship to their carriers.

CFA Insurance Director J. Robert Hunter said such litigation, ifinitiated, would be a “silly lawsuit,” as well as a waste of timeand money. He said IIABNY should be working to resolve inherentconflicts-of-interest over compensation and not seeking to keep thesystem unchecked.

“This lawsuit is clearly a diversionary maneuver to preserveindustry secrecy about compensation practices that are grosslyunfair to customers and completely indefensible in today'sinsurance marketplace,” said Mr. Hunter.

“By going to court and continuing their advocacy campaign,IIABNY is undermining a year-long negotiating process to reach afair accommodation between consumer organizations and the insuranceindustry,” he added. “How long are independent agents and brokersgoing to stonewall even minor progress in cleaning up theindustry's financial conflicts of interest?”

Birny Birnbaum, executive director of Center for EconomicJustice in Austin, Texas, said an outright ban on contingency fees“would be the most logical and efficient means to curtail theseabusive practices.”

But he added that the New York department's effort to deal withthe issue is “a good faith effort” that receives “our enthusiasticsupport as a significant, concrete step forward in breaking theimpasse on these issues.”

“At a bare minimum, customers have a right to know the detailsof broker/agent compensation arrangements, so they can protecttheir economic interests in obtaining affordable, appropriatecoverage for their needs and make an informed choice,” said ChuckBell, programs director at Consumers Union.

NYPIRG Legislative Counsel Russ Haven said the department'sproposal would give consumers “valuable information.”

“While a negligible burden to agents and insurance companies,this would be a huge benefit to consumers trying to comparison-shopfor policies,” he said.

Responding to the criticism, Richard A. Poppa, president andchief executive officer of IIABNY, said the consumer advocates are“entitled to their opinion, but they are clearly wrong. They do notunderstand our position,” adding that their assessment of IIABNY'sposition is “not accurate.”

Their comments, he said, do not reflect the association'sposition and lacks understanding about what agents and brokers dofor their clients.

He said the association adopted a voluntary disclosure policy in2004 that says producers need to reveal their compensationinformation when a client wants to know about it. If an agent orbroker fails to comply, “there are 20 agents waiting in the wingsto provide for that client's needs.”

“Their accusation and comments that agents and brokers keeptheir clients in the dark is simply wrong,” he said, adding that hebelieves the regulations are unnecessary.

None of the consumer groups have contacted IIABNY to discuss thegroup's position, he pointed out, adding he would welcome a meetingwith them.

“We have nothing to hide or that we feel can't be addressed,” hesaid. “We just feel that the marketplace is a better arbiter ofthis issue than regulation.”

As for the possible lawsuit, Mr. Poppa said the threat of legalaction is necessary under New York codes when raising objections toa proposed regulation. He said the association has filed no legalaction and is hopeful it can avoid doing so as it continues todiscuss the issue with the department.

“While we disagree, we try not to be disagreeable,” said Mr.Poppa of talks with the department. “This is an honest differenceof opinion between two honorable parties. We have to fight for ourmembers and [their] clients. And that is what we are trying todo.”

According to a letter sent by IIABNY to the department after therule was published in the Dec. 2 New York State Register, theinsurance superintendent “does not have legal authority to compelcompensation disclosure.” IIABNY also argued that there are“serious problems with the proposal's extent.”

Matthew Gaul, special counsel for the department, said, “We aresurprised that what we viewed as the least controversial aspect ofthe disclosure rule has prompted a threat of a lawsuit–therequirement that agents and brokers clearly explain who theyrepresent in a transaction.”

He added that “for years the Big I [IIABNY's nationalassociation] members have said they are the 'Trusted Choice' forconsumers. What they apparently don't want to tell their customersis that in most transactions, they represent the insurancecompany.”

Explaining the justification for the disclosure initiative, thepublished rule states: “The proposed regulation is intended toprovide a means to address the potential conflict that arises dueto the differences in the amount of compensation an insurer pays toits producers in the least invasive manner possible–by requiringthat insurance producers make certain disclosures about their rolein the insurance transaction and compensation arrangements withinsurers 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 Office investigation found that some of the biggestcommercial insurance brokers had taken undisclosed contingencypayments from insurers to steer clients toward carriers involved ina 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.

“We ultimately believe this rule is not necessary,” said Mr.Poppa. “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 theirrole–specifically 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 they willbe acting as an agent or broker for all lines of coverage in agiven transaction.

“This provision of the proposed regulation requires thatproducers evaluate complex legal concepts and then make legalconclusions that even the judiciary has struggled with,” accordingto IIABNY's letter. “Unfortunately, unless the proposed regulationis withdrawn, we will have no alternative but to seek redress inthe court system to challenge the proposed regulation and anyefforts to adopt a similar regulation.”

Matthew Guilbault, director of government and industry affairsfor the Professional Insurance Agents of New York, said hisassociation has been working with other agent and carrier groupsthroughout the process and that bringing a lawsuit has always beensomething that was “on the radar screen.”

For PIANY to initiate such an action, however, he said thedepartment would have to unfairly single out independent agents fordisclosure requirements, which it has not done in its publisheddraft.

Mr. Guilbault said PIANY is still opposed to mandatorydisclosure, but he said this latest version is “substantiallybetter” than the 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 one is filed, and that the decision would ultimatelyrest 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, he said the definition of “compensation” is overlybroad. If a carrier takes a producer to lunch, he wondered, wouldthat qualify as compensation that a producer needs to disclose?

Mr. Birnbaum of the Center for Economic Justice called thethreat of legal action “unfortunate,” and said he is struck by thefact that IIABNY believes 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 [threatened] lawsuit,” he said.