A controversial New York producer compensation disclosure regulation complies with the law and is necessary to inform consumers about possible conflicts of interest, the state's attorney general and leading candidate for governor argued in a court filing.

"It is not a radical concept for a customer to know how the customer's representative is being compensated so that any potential or actual conflict of interest may be properly evaluated," New York Attorney General Andrew Cuomo said in filing a response in the state's Supreme Court in Albany to a lawsuit challenging the regulation.

Explaining the potential for a conflict of interest, Mr. Cuomo–the presumptive favorite in this November's New York governor's race–said that "where the producer receives an incentive payment for recommending a particular insurer or insurance product to its customer, there is an inherent conflict of interest in this structure."

He added that the new rules–Regulation 194–"merely requires that the producer disclose this conflict of interest to the customer."

The regulation is set to take effect on Jan. 1, 2011. It requires producers to disclose certain information about their compensation to clients.

The Independent Insurance Agents and Brokers of New York, along with the Council of Insurance Brokers of Greater New York, filed a lawsuit in an attempt to prevent implementation of the regulation.

The agent groups are arguing that:

o The New York State Insurance Department does not have the authority to mandate disclosure.

o Compliance would impose "massive and unwarranted" costs on agents.

o The regulation violates producers' rights to due process and equal protection under the state and U.S. Constitutions.

However, in his July 29 court filing, Mr. Cuomo said the regulation "comports in all respects with both the letter and the spirit of the Insurance Law…."

He asserted that the state's insurance superintendent does indeed have "broad power to interpret, clarify and implement the legislative policy."

He added that the court "should give deference to the superintendent's function and expertise when reviewing the validity of Regulation 194."

Mr. Cuomo said the regulation was promulgated to ensure that consumers better understand the role producers play in the purchase of insurance.

"To suggest that producers should not have to tell insurance customers that a potential or actual conflict of interest may exist is simply untenable," Mr. Cuomo said in the filing.

Regarding petitioners' claim that there is no empirical data to support the need for the regulation, Mr. Cuomo pointed to a two-year investigation by the insurance department and Attorney General's Office, beginning in 2005, which resulted in "numerous enforcement settlement agreements."

Mr. Cuomo was referring to work by his predecessor, Eliot Spitzer, who targeted a number of large brokerages for allegedly participating in a bid-rigging scheme in which accounts were steered to certain carriers in return for contingent commissions.

Settlements were reached to resolve the charges without any admission of guilt, which included agreements to no longer accept contingent fees based on total volume or profitability of business. Those restrictions were recently lifted in return for an agreement to abide by the forthcoming New York disclosure regulations.

"Clearly, the [insurance] department had an understanding of operational practices, evaluated factual data and drew inferences therefrom," according to Mr. Cuomo.

He insisted that the regulation does not reach too far, and does not limit or restrict any form of compensation.

In a separate filing, Matthew Gaul, deputy superintendent at the insurance department, said the regulations were not written in a vacuum, as his office heard and considered petitioners' concerns throughout the process of developing the rules and made several changes based on the feedback from producers.

He added that the department does not believe the regulation will impose "undue costs" on producers and argued that "any minimal costs of compliance are outweighed by the public interest in transparency surrounding potential conflicts of interest."

Richard A. Poppa, chief executive officer and president of IIABNY, declined to go into detail regarding how IIABNY will respond to Mr. Cuomo's and Mr. Gaul's arguments, stating that he would prefer to respond directly rather than through the press.

But he did note that IIABNY believes the state's representatives raised a number of points "that we simply don't think are accurate and will be responding to."

He also said the comments in the court filings are "nothing new" and "nothing unexpected."

Special Reports /

N.Y. Attorney General Defends Proposed Compensation Disclosure Rule

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