Another Broker Gets Fee Subpoena In N.Y.

Norman Williams, speaking for California Insurance Commissioner John Garamendi, said the department at this point is investigating on its own, but there may be coordination with the state attorney general's office in the future. "I'm not sure what they are doing on this," the official said.

Letters requesting the fee investigation were sent to Mr. Garamendi, California Attorney General Bill Lockyer, New York Attorney General Eliot Spitzer and New York Insurance Commissioner Gregory V. Serio in February by the Washington Legal Foundation, a non-profit group in Washington, D.C.

Mr. Garamendi in March wrote WLF to say that he had assigned a senior attorney and his chief investigator to investigate the matter.

The WLF questioned the propriety of the fees as something that could possibly lead brokers to channel their customers' business to insurers that paid "handsome" fees. Customers, WLF said, run the risk of paying more for unneeded coverage and getting less in overall policy benefits.

Kaye Insurance Associations Inc., a subsidiary of Chicago-based Hub International Ltd., said late Friday it received a subpoena from Mr. Spitzer's office.

Earlier, three major insurance brokerage firms–Marsh, Aon, and Willis–all announced that they received subpoenas from the AG's office requesting documents related to the fees. All of them defended the fees as a longstanding practice.

Contingency fees have been the subject of criticism for years within the insurance industry. The payment arrangements with insurance companies are in addition to commissions that brokers receive. The fees are based upon the amount of business or the quality of business that a broker places with an individual company.

Kaye, as well as Marsh, Aon, and Willis, say they disclose their fees to clients either directly or through invoices. Information about the fee arrangements is also available on their Web sites.

The investigation, according to a source, involves a number of brokers in the state.

On the subject, one insurance broker–Hilb, Rogal & Hobbs of Richmond, Va.–said during an investors conference call last Thursday that it was no longer disclosing contingency fees as a separate item as part of its quarterly financial statements. Executives said they were doing so because of their unpredictability.

It was unclear in the call if this policy was being extended to clients. A media representative at the firm said she would attempt to get clarification of the issue from company executives. She said she did not know if the firm received a subpoena.

Speaking on behalf of the Washington-based Council of Insurance Agents & Brokers, Barry R. Meiners, director of marketing and communications, said: "Our policy and the policy of the Council members is that we believe in full disclosure. It is a written policy we have had for six years in the Council."

He added that the investigation by Mr. Spitzer's office is "based on the suspicion that there is something undisclosed, but contingency fees are well known in the industry and are fully disclosed."

Robert A. Rusbuldt, chief executive officer for the Alexandria, Va.-based Independent Insurance Agents & Brokers of America, argued that the major difference in the relationship between commercial insurance buyers and other financial institutions, such as the mutual fund industry, is that insurance buyers are not na?ve purchasers.

Corporate insurance buyers understand the process and work with their brokers through the placement process, said Mr. Rusbuldt. He added that the buyer, whether it is the chief financial officer or the risk manager, is aware of the different policy terms and premiums offered by different companies. They make the buying decision based on a considerable amount of information, which includes contingency fees.

"The bottom line, I think," said Mr. Rusbuldt, "is that there have been some erroneous comparisons made between the mutual fund and insurance industries. Our hope is that this will become very apparent to the attorney general and his staff and it will quickly take care of itself."

Mr. Serio's office has so far not responded to requests for comment on the issue of the fees. In 1998, the New York department warned brokers that failure to disclose the fees could be illegal.