Brokers Could Face Lawsuits Despite Disclosure

He added that "theoretically, if a scheme to defraud could be alleged, state and federal civil RICO statutes" could be employed, referring to the Racketeering Influenced and Corrupt Organizations Act. Indeed, if evidence is uncovered showing that a broker made mailings or telephone calls as part of the scheme, "you can argue mail fraud and wire fraud. This carries treble damages and gets you into federal court," he said.

With every plaintiff lawyer looking for the next class action, "if you're a major broker, you've got to be concerned because of the environment we live in," he added.

Mr. Biging, who specializes in defending brokers and agents against errors and omissions claims, said brokers take the position that it is "well-known that these agreements are in place and it doesn't affect zealous representation."

He said the claim that the fees represent an inherent conflict could be rebutted if there was a showing that they were disclosed, that clients had a full understanding, and there was no evidence that fees influenced placement decisions. However, Mr. Biging said the extent of disclosure could become an issue if there is evidence that a broker did not disclose there were better policies for much less money available to a client.

Theoretically, he said, a comparison of rates for a type of coverage could lead to questions that would fuel a legal dispute. "Then you have to get into details of policy language," he noted. "Maybe [the client] wanted x, y and z" provisions.

"It wouldn't be an easy case to make," he conceded, but noted that brokers could still be hurt if material surfaced that attorneys could use to bring a class action and get it certified. "With a class action, the risk of enormous recovery leads to settlements," he added.

Mr. Biging's concerns were echoed by a report from New York-based Advisen a consulting firm that works with the Risk and Insurance Management Society on its "Benchmark Survey" which warned that should the fee probes uncover harm to clients, there could be a "stampede to the courthouse" to sue brokers.

Jeffrey Wilder an economist who did a small study for his doctorate that compared the behavior of agents in a brokerage who earned contingency fees and those who did not found the fees had a definite impact. However, he noted, his data included only the price at which a policy was written and did not include the quotes that an agent was given before placing the insurance.

Whether an agent knowingly booked policies for customers that could have been obtained from a different insurer at a lesser price, while providing the same coverage in all respects, "I can't tell from that data," Mr. Wilder said.

Mr. Wilder, who now works as an economist with the U.S. Justice Department Anti-trust Division, wrote in his study that the impact from the fees was conditioned by the strength of the agent's relationship with an account.

On accounts with which agents had a weaker relationship, agents were found to be far more likely to place new business with insurers who paid them fees for generating premium volume. "Faced with many such contracts, an intermediary has strong incentives to consolidate its sales among its dominant suppliers," Mr. Wilder wrote.

His research suggests, the paper said, that "an agent's fiduciary duty obligation to the client does not alone suffice to ensure an agent acts in the client's best interest."

His paper followed an examination of 7,400 commercial policies written in a single Arizona brokerage from 1994 through 2000, and compared the actions of three brokers who were eligible for the contingency fees and eight who were not.

Reproduced from National Underwriter Edition, May 14, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.