California Regulator Ready To Sue Brokers

NAIC Vice President Joel Ario said the group agreed to form a committee to address problems and begin an "aggressive fact-finding effort." Regulators will designate a representative in each department to gather information and field public inquiries, he noted.

Mr. Ario, who is Oregons insurance administrator, said regulators will be coordinating their efforts with the offices of the state attorneys general.

He said that one of the steps regulators are taking is to see what existing authority they have to prevent further abuses. He said a proposed regulation filed in Oregon this month would require more disclosure of brokerage fees and any compensation from insurers, and that the rule might be changed to give it additional strength.

The Oregon regulator said he thought the NAICs coordinated effort could lead to market conduct exams of some companies. He noted that the issue of broker fees had been looked at once before by the New York Insurance Department, but said the issue of bid rigging, "to my knowledge, is quite new."

Commissioner Garamendi said that on Oct. 14when New York Attorney General Eliot Spitzer filed a civil action accusing Marsh of rigging bids and fixing prices with major insurers in exchange for payoffs disguised as contingency feesCalifornia had planned to file a civil action as well, but "hit a speed bump." California investigators, he said, have been working with Mr. Spitzer.

He said his probe started with broker fee arrangements involving large commercial lines, and that "as we moved along we discovered problems in other areas. Whats going to be next? I dont know." The new rules, the civil action filed, and his continuing investigation are "the first pages in a long and sordid book," he added.

All of his proposed rules, he said, repeat, strengthen and clarify existing regulations requiring full disclosure of broker compensation agreements while setting fiduciary duty requirements for brokers. The new rules provide that violations can be punished with fines of $10,000 per incident and revocation of a companys or brokers license.

Brokers are not required to make their disclosures in writing, but Mr. Garamendi said he would "highly recommend they do so."

The new rules call for brokers to provide clients with the best insurer proposal available. It calls for punishment for failure to alert clients to the best deal, for advising them not to select the best available insurer, and for failing to take reasonable measures to obtain a quote from an insurer that might be the best available.

"This industry is aware there are problems and must now be in the process of cleaning up its act," Mr. Garamendi said.

In the meantime, Connecticut officials confirmed that a joint investigation of brokers begun in August by Insurance Commissioner Susan Cogswell and Attorney General Richard Blumenthal has been expanded to look at antitrust activity.

The initial probe examining potential conflicts in the commercial insurance brokerage industry was kicked off with a questionnaire asking for dozens of details about commercial and group health insurance company commission agreements with brokers. As part of the expanded inquiry, various parties have recently been served with subpoenas, but those parties were not identified.

Reproduced from National Underwriter Edition, October 21, 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.