It's Time To Revamp The Contingency Fee Ban

Should all New York insurance intermediaries be denied the opportunity to earn contingent commissions because mega-brokers were forced to give up that lucrative revenue stream as part of settlements of bid-rigging allegations? I don't think so–but on the other hand, perhaps it's time to reconsider the ban hamstringing the big firms as well.

“There should be a level playing field in our industry. That doesnt exist on the brokerage industry landscape today, declared Don Bailey, CEO of Willis North America, who called for a ban on all such side deals at a hearing before the New York Insurance Department this month in Buffalo. (Click here for the complete story.)

Because all but the major brokers accept contingents, the larger firms are operating at a competitive disadvantage, he added. We are constrained in our ability to compete on price with those who still accept contingents. Its a simple fact that brokers who accept contingent commissions are essentially getting a subsidy from insurers on the prices they offer clients.

While I can appreciate why Mr. Bailey would make such a demand, his proposed solutiona universal ban, harming those who have done nothing wrongis throwing the baby out with the bath water.

Instead, what Willis and the other mega-brokers should be calling for is a modification of their fee bans to allow them to once again draw bonuses from insurers, but with the proviso that all compensation is transparent and carefully monitored.

That way, the playing field would be leveled without denying honest, law-abiding agents and brokers hard-earned income that might be keeping many intermediaries in business, what with straight commissions plunging along with property-casualty prices during this softening market.

After the mega-brokers were caught rigging bids, with contingency deals serving as covers for kickbacks, regulators and the New York Attorney Generals Office–led back then by the now disgraced ex-governor, Eliot Spitzerhad every right to cut off the ill-gotten fees fueling such unethical and illegal misbehavior.

However, a few years have passed, and no one ever suggested the ban on fees negotiated with the guilty parties had to be a lifetime punishment. Perhaps now is the time for the New York insurance department and AGs office to revisit the ban.

My suggestion would be a probationary period.

First, lift the ban, but impose strict disclosure requirements on the mega-brokers upfront to clients, whether they ask about compensation or not, to discourage any shenanigans. Require other intermediaries to ask their clients if they would like more information about their compensation, but not be required to provide it unless the buyer wants to know more.

As a further, transitional safety check, have an outside firmchosen by the AG or insurance department, and paid for by the brokeragedo a regular compensation audit, again to provide an incentive for the big brokers to keep their operations beyond reproach.

Of course, if any broker is caught abusing contingent fees or a clients trust again, a fine and ban on such deals could be imposed.

In timeperhaps three-to-five-yearsthe audit requirement might be dropped for those firms with a squeaky clean record.

In this way, no intermediary is denied an honest living. After all, the New York Supreme Courts Appellate Division last month ruled that Liberty Mutual could not be held responsible for failing to disclose payment of contingent commissions to brokers, because such fees are not illegal. (Click here to read that story, and here for agent reaction to the decision.)

Its not the fees that were evilbut those who abused the privilege. The changes Ive suggested recognize and address that reality.

What do you folks think?