Four consumer groups are blasting the Independent Insurance Agents and Brokers of New York for their threat to sue the state insurance department over proposed compensation disclosure regulations.

The Center for Economic Justice, the Consumer Federation of America, the New York Public Interest Research Group and Consumers Union released a statement admonishing the agent association for threatening to take legal action when the department is attempting a good-faith effort to make producer compensation arrangements transparent.

The department has published proposed Regulation No. 194, which sets out rules for agents and brokers to disclose to their clients their compensation arrangements with insurers and explain their relationship to their carriers.

CFA Insurance Director J. Robert Hunter said such litigation, if initiated, would be a “silly lawsuit,” as well as a waste of time and money. He said IIABNY should be working to resolve inherent conflicts-of-interest over compensation and not seeking to keep the system unchecked.

“This lawsuit is clearly a diversionary maneuver to preserve industry secrecy about compensation practices that are grossly unfair to customers and completely indefensible in today's insurance marketplace,” said Mr. Hunter.

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

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

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

“At a bare minimum, customers have a right to know the details of broker/agent compensation arrangements, so they can protect their economic interests in obtaining affordable, appropriate coverage for their needs and make an informed choice,” said Chuck Bell, programs director at Consumers Union.

NYPIRG Legislative Counsel Russ Haven said the department's proposal 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-shop for policies,” he said.

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

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

He said the association adopted a voluntary disclosure policy in 2004 that says producers need to reveal their compensation information when a client wants to know about it. If an agent or broker fails to comply, “there are 20 agents waiting in the wings to provide for that client's needs.”

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

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

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

As for the possible lawsuit, Mr. Poppa said the threat of legal action is necessary under New York codes when raising objections to a proposed regulation. He said the association has filed no legal action and is hopeful it can avoid doing so as it continues to discuss 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 difference of opinion between two honorable parties. We have to fight for our members and [their] clients. And that is what we are trying to do.”

According to a letter sent by IIABNY to the department after the rule was published in the Dec. 2 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 the least controversial aspect of the disclosure rule has prompted a threat of a lawsuit–the requirement that agents and brokers clearly explain who they represent in a transaction.”

He added that “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 disclosure initiative, 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 Office investigation found that some of the biggest commercial insurance brokers had taken undisclosed contingency 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.

“We ultimately believe this rule is not necessary,” said Mr. Poppa. “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 their role–specifically 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 they will be acting as an agent or broker for all lines of coverage in a given transaction.

“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,” according to IIABNY's letter. “Unfortunately, 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 and industry affairs for the Professional Insurance Agents of New York, said his association has been working with other agent and carrier groups throughout the process and that bringing a lawsuit has always been something that was “on the radar screen.”

For PIANY to initiate such an action, however, 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 latest version 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 one is filed, 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?

Mr. Birnbaum of the Center for Economic Justice 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 [threatened] lawsuit,” he said.

Special Reports /

Consumer Groups Hammer IIABNY Over Possible Agent Disclosure Lawsuit

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