Carriers Could Revise Commission Plan On N.Y. Decision

Insurance carriers who stopped paying agents contingent commissions in the wake of the commercial insurance bid-rigging scandal might be able to change those agreements after an appeals court ruled such commissions are legal, an agents' group official suggested.

The comments came from Kenneth R. Auerbach, president-elect of the National Association of Professional Insurance Agents and managing director and general counsel for E&K Agency in Eatontown, N.J.

In an interview with National Underwriter, he reacted to a decision by the New York Supreme Court, Appellate Division First Department that found contingent commission payments are not illegal and no insurer was under any obligation to reveal those payments because "no special relationship" existed between the parties.

The case arose from a 2006 action by the New York Attorney General's Office against Boston-based Liberty Mutual over allegations the company engaged in a bid-rigging scheme with some of its top brokers who were rewarded with kickbacks disguised as commissions.

After failing to reach an agreement with then Attorney General Eliot Spitzer, the company vowed it would reject the state's proposal for a settlement with terms it found to be "excessive and unreasonable."

"This marks the end of the Spitzer era," said Mr. Auerbach.

Outside of a few attorneys general who "have stepped into the policy making realm," no state has banned or altered the contingent commission arrangements between agents and carriers, said Mr. Auerbach. He called it a strong indication that the arrangements are not viewed as a violation of a policyholder's rights.

However, the ruling would have little effect on those brokers that entered into settlements to give up contingent commissions because they are private agreements with attorneys general. On the other hand, he said those few insurers who agreed not to pay contingent commissions, would probably seek to make adjustments in their settlements similar to what the brokers have done in specific circumstances.

For agents, he said, they must remain vigilant over this issue, noting that some regulators still appear to be trying to alter the compensation arrangements.

"We find this offensive to what our members stand for," said Mr. Auerbach of continued attempts to alter contingent payment arrangements. "We (agents and brokers) have always thought of ourselves as the front line guys who protect their clients, protect their consumers. These accusations fly in the face of everything we try to do. So there is an emotional aspect to this, which may be why we fight so hard on this issue."

He said there is confusion over the power of the average agent or broker to engage in the kind of steering the mega-brokers were accused of that needs to be addressed. The mega-brokers controlled market segments, while Main Street America agents and brokers do not have that type of market clout.

Competition remains the primary safeguard of the marketplace, he said, and attempts to eradicate contingent commission payments would do more to harm consumers than to help.