Garamendi Subordinate Sings A Pro Industry Tune

Garamendi Subordinate Sings A Pro Industry Tune

By Susanne Sclafane

NU Online News Service, Nov. 4, 4:30 p.m. EDT, San Diego? A California insurance regulator, whose boss has called revelations from a probe of broker fees a "long and sordid book," told an underwriters' conference here the broker situation is "a distraction."

David Diehl, deputy commissioner of the California Department of Insurance said that New York Attorney General Eliot Spitzer's investigation into broker bid-rigging and other inquiries are "distracting us and the industry from our core business."

He noted that Tuesday the Kansas City, Mo.-based National Association of Insurance Commissioner announced that a 13-state task force would look into broker investigations, putting out calls for data for carriers to respond to and possibly looking to create new model disclosure laws.

"All this is very distracting," he said during a meeting of the Professional Liability Underwriting Society based in Minneapolis.

His remarks seemed somewhat at variance with the tone set by California Insurance Commissioner John Garamendi who announced on Oct. 20 that he plans to sue unidentified segments of the insurance industry in connection with an investigation of broker incentive fees that have led to charges in New York of broker bid-rigging and price-fixing in exchange for insurer kickbacks.

Mr. Garamendi then outline proposed new state rules designed to counter illicit fee arrangements but made no mention of a distraction. He said the suit he planned was one of the "first pages in a long and sordid book."

Asked by moderator Tom Baker, a professor of law at the University of Connecticut, to provide the audience with two "take-away" messages to kick off a panel session, Mr. Diehl said: "What I've learned from 30 years in the industry is that whether you're on the agency side, the company side, or the regulatory side, when the dust settles?all of us are in this boat together.

"It doesn't do any good to try to pin the blame to the regulators, the companies, the agents, because we're all in the insurance industry?If negative publicity occurs, it happens to the insurance industry.

"Contingent commissions have been out there since?as long as dirt," he said, noting that they've been around for all his 30 years in the business (as both a regulator and insurance company employee).

"The question we have to ask ourselves is whether the practice itself is bad or whether there are a few bad apples in the process who are making it bad for everyone," he said, indicating that those who must ask the question include regulators, attorneys general, and the National Association of Insurance Commissioners.

Mr. Diehl was one of several panelists at the opening session of the society's annual meeting to distinguish between the legality of contingent commissions and bid-rigging practices, suggesting that the two are not necessarily connected.

Vince DiBlasi, an attorney who specializes in defending carriers, suggested that insureds who want to sue over broker fees by alleging lack of disclosure of such practices don't have solid causes of action because of the likelihood of widespread knowledge of such practices among insurance buyers.

Although Mr. Diehl and Mr. DiBlasi were participating in a panel discussion entitled, "Outside Perspectives on the Professional Liability Insurance Industry," Mr. Diehl began his remarks suggesting that regulators are not outsiders.

The question of how long certain insurance brokerage practices and information have been around?and known about?was a common theme among panelists.

Mark Solomon, a plaintiffs' attorney from Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, for example, said, "This has been well-known in the industry for some time. Whispers began in January or February," he said.

"My firm," said Mr. Solomon, "filed the first racketeering case in August," before the New York Attorney announced charges that Marsh Inc. brokerage was involved in a bid-rigging scheme with major insurers who paid kickbacks to get business.

Isn't the question of contingent commissions something apart from bid-rigging? Mr. Baker asked, urging separation of the two practices, and an additional distinction from tying practices (in which a broker allegedly places good business for an insurer in return for having the insurer place its own reinsurance through the broker's reinsurance operation).

"To me it seems that all those things shouldn't be lumped together," Mr. Baker said.

Mr. Diehl said there are indeed "multiple questions and multiple issues."

Giving an example of one set of questions, he asked: Are contingent commissions in and of themselves illegal or is it that they are not being properly disclosed?

And what if the broker goes to the client and says "part of my compensation is this" and makes the client sign a paper saying the broker discussed that compensation structure with the customer. "Is that sufficient disclosure?" he asked.

And "even if we go through all these excruciating things and agree that contingent commissions [that are] disclosed are OK, that still is no excuse to bid-rigging," he went on to say.

"There is a disconnect there," he said noting that media reports "smush those things together. There is no circumstance that I can think of where bid-rigging is acceptable."

While Mr. DiBlasi also said bid-rigging was unacceptable, he rose to the defend the lack of disclosure, suggesting that all participants in insurance transactions?including customers who may come from brokerage ranks?knew what was going on.

Mr. DiBlasi, who is with the New York-based Sullivan & Cromwell firm, followed up on Mr. Diehl's remarks by first calling for greater distinction than just separating bid-rigging practices from contingent commission agreements.

"Obviously big-rigging, whether it has to do with highways or construction contracts or insurance is illegal," he said. But bid-rigging in the insurance broker context is not analogous to an antitrust situation "like the fixing of the price of a uniform commodity like milk," he said.

Unlike the commodity situation, in the broker world, "the amount of steering or rigging that there would have to be in a given year to do a deal to [get] over a threshold isn't really very much in relation to the total amount of insurance," he said.

"These [broker] cases are not suitable for class treatment," he said. "Each particular situation is either rigged or it isn't?and most of them aren't," he said, suggesting that class actions would be unsuccessful because rigging must be proved in each individual situation.

Turning to issues of disclosure, Mr. DiBlasi said: "Where you have practices that have gone on in the industry for years and years and years, and people go from [working as] the broker to the carrier to the corporation buying insurance, I have a very hard time seeing that as a disclosure case."

"It's certainly not actionable as a class action because there are plenty of people who knew that there were such things as incentive [compensation] and other forms of threshold-crossing structures that brokers and insurance companies entered into. And by that I mean the consumers," he said.

"In a market that involves professionals [and] almost everyone knows what the compensation structure is, I have a hard time thinking that you're going to persuade anybody that a fraud was committed by some of those people on others of those people while they were in one job but not the other. I just don't see it," he said.