The Insurance and Reinsurance Report

New Insurance Agent and Broker Rules Regarding Disclosure of Contingent Commissions Which Take Effect in New York January 1, 2011

New insurance agent and broker disclosure rules regarding contingent commissions are scheduled to take effect in New York on January 1, 2011:  “NYCRR 30 (Regulation 194 Producer Compensation Transparency).  This regulation has spurred much debate in the insurance industry.  Terry Fleming, President of Risk and Insurance Management Society, stated in an opinion column in the September 6, 2010 edition of The National Underwriter that contingent commissions for insurance brokers cause “an inherent conflict of interest” and he defended the New York law mandating greater disclosure.  The Independent Insurance Agents and Brokers of New York (IIABNY) through its President and CEO Richard A. Poppa, disagreed in a letter to the editor noting in part that “profit sharing aligns the interests of the clients with the interests of the insurer and producer by providing an incentive for well-underwritten business to put in place, and timely claims adjudication to be undertaken.  Profit sharing agreements are ethical, legal, and help transaction in a better position.”  See IIABNY, Big I say RIMS’ Contingent Commission Stance Is Wrong. 

http://ifawebnews.com/2010/09/20/iiabny-big-i-say-rims-contingent-commission-stance-is-wrong/

IIABNY, Inc., has opposed the new broker rules set forth in New York Insurance Regulation 194.  Essentially Regulation 194 requires insurance agents and brokers to disclose information about their compensation to all clients in the first instance.  Then if the client requests more information, the insurance agent or broker must provide further details about his or her compensation for the policy and what that compensation would have been if the insurance agent or broker procured a different policy for the insured.  IIABNY, Inc. and others filed an Article 78 proceeding against New York Superintendant of Insurance James L. Wrynn alleging that the New York State Insurance Law does not give the Insurance Department authority to mandate disclosure of compensation.  In a decision issued November 17, 2010, the trial court found that Regulation 194 is valid.[1]  Although petitioners including IIABNY, Inc., may appeal, insurance agents and brokers in New York must prepare for implementation of Insurance Regulation 194 which goes into effect January 1, 2010.  It is also anticipated that other states may follow New York’s lead and adopt similar producer compensation disclosure regulations.  Here we summarize the highlights of some of the key provisions of Insurance Regulation 194:

Contingent Commissions 

Section 30.3 (a) ~ Mandatory Initial Disclosure

Boilerplate form only few sentences long may be used which advises of:   

• The agent’s or broker’s role in the transaction.
•  Whether the agent or broker will receive compensation from the insurer.
• That the compensation may vary depending on volume of business done with the insurer or its profitability.
•  That the purchaser may receive more detailed information upon request.

Section 30.3 (b) Disclosure Upon Request

•  If asked by the purchaser the agent or broker must also provide a more detailed written disclosure of the amount of compensation expected to be received as well as;
  • A description of the alternatives presented by the agent or broker and the associated compensation.
• • Amount can be described as total dollar amount or as a percentage of one year premium.

 Section 30.3 (d) Disclosure of Reasonable Estimate of Compensation

•  Compensation is “not known at the time of disclosure” when it is contingent on sales volume, profitability or retention targets. 
  • May estimate as a reasonable range of percentages of premium based on compensation from the sale of similar policies in prior years or;
• • Estimate as dollar amounts based on prior years.

 Section 30.3 Retention of Disclosure

•  Must be retained for three years unless agent or broker has a written agreement that the insurer will retain.

 Section 30.6 Obligations of an Authorized Insurer

•  Requires that the amount of any compensation that an authorized insurer or its agent pays to an insurance producer shall be maintained by the insurer in accordance with Regulation 152. 

 It is Noteworthy that Regulation 194:

•  Does not apply to Wholesalers or managing general agents whose primary contact is with the retail broker.
•  Will the disclosure Rules apply to insurance agents and brokers outside of NYS?
•  Several states have stated they will follow New York’s lead and seek greater disclosure of commissions and fees.

 New York State Insurance Department Circular Letter No. 18 dated November 5, 2010

On November 5, 2010, the New York State Insurance Department has issued a Circular Letter No. 18 2010 proving guidelines for compliance with Regulation 194.  The NYSID clarified disclosure requirements for life insurance and the types of policies that last several years but that pay most producer compensation in the early years.  The NYSID also advised that a producer may use an insurance company provided estimate of his or her compensation when a prior history of profit sharing is not available or easily calculated.  The NYSID noted that a producer may respond orally to a client’s request for additional compensation, despite the fact that parts 30.3 (b) and (c) do not state this.  See IIABNY, The Situation Room —Producer Compensation.

The NYSID also clarified in its circular letter that an insurer may delegate to a licensed insurance agent its obligation under § 30.6 to maintain records regarding the amount of compensation paid to the agent, “provided that the agent maintained the records in accordance with NYCR’s 243 (Regulation 152).”  It seems to us then that the insurer would have to monitor to ensure the insurance agent was in compliance.

IIABNY has expressed its concern that the NYSID revised Circular Letter did not address the following issues:

•  How and under what circumstances the regulation will apply to produces who are residents of other states?
•  A precise definition of the types of compensation subject to and exempt from the disclosure requirements.
•  The precise timing of the required initial disclosure.
•  Whether the department considers producer ownership of any individual shares of a company to constitute an ownership interest and the criteria for determining whether that interest is material.

 Conclusion

New York insurance agents and brokers will want to keep themselves informed on this timely issue and incorporate best practices for complying with Regulation 194.  PLM will continue to monitor this issue and inform our readers of further developments as well as strategies for complying with the regulation.

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[1]   See Sullivan Financial Group, Inc, et al. v. James J. Wrynn, Supreme Court, Albany County (November 17, 2010)

 

For a copy of the decision, click here.

Colleen Murphy

http://www.goldbergsegalla.com/attorneys/Murphy.html

Federal Judge Ends Insurer’s Effort to Recoup Money Paid to Insured

Houston Cas. Co. v. Sprint Nextel Corp., Case No. 09-CV-1387 (E.D.Va, November 22, 2010)

This coverage dispute arose out of an underlying securities action. In 2004, Sprint discontinued one line of stock. The shareholders whose stock was converted filed a securities action accusing Sprint of undervaluing their stock. Eventually, a settlement was reached in the amount of $57.5 Million.

At the time of the conversion, Sprint was insured under a number of D&O policies providing $100 Million in coverage, including an excess policy issued by Houston Casualty providing $15Million in coverage. Houston Casualty agreed to contribute to the settlement, but reserved the right to deny coverage and seek reimbursement. Houston Casualty filed the instant action after another insurer (Federal Insurance Company) secured a decision declaring that it was not required to provide coverage for the underlying securities claim.

Initially, the court rejected Houston Casualty’s argument that the underlying settlement was not a “loss” because the settlement merely redistributed assets among different classes of Sprint shareholders.  Moreover, the court held that paying the settlement did not violate Kansas public policy.

Turning to Houston Casualty’s effort to recoup the monies provided to fund the settlement, the court held that Houston Casualty could not obtain restitution because there was no basis under the policy for an insurer to make a settlement advance and later seek its return. The court noted that the policy contemplated the return of defense costs, but did not provide for the return of settlement payments. Further, Sprint did not reach an agreement beyond the terms of the policy granting Houston Casualty the right to seek reimbursement.

In the end, the court awarded summary judgment in favor of Sprint and dismissed Houston Casualty’s claim.

For a copy of the decision, click here

Brian Biggie and Sharon Angelino

http://www.goldbergsegalla.com/attorneys/Biggie.html

http://www.goldbergsegalla.com/attorneys/Angelino.html

California Court Affirms Judgment Against Insurance Agent HRH

Williams v. Hilb, Rogal & Hobbs Ins. Services of California, Inc.

(Cal. App. September 9, 2009)

Following a bench trial, an insurance agency was found liable for negligence in advising on, procuring and maintaining an insurance package for a new business venture that did not include worker’s compensation insurance.  The court held that although an insurance agent does not have a duty to volunteer to an insured that the latter should procure specific insurance coverage, the rule changes under certain circumstances.  An agent who assumes additional duties, by holding itself out as having expertise in the insurance being sought by the insured may be liable to the insured for losses which resulted as a breach of that special duty.

 

Here, the court found: (1) the agent held herself out as having expertise in the insurance needs of the new business venture; (2) these needs necessarily included coverage for bodily injury to employees; (3) the application the agent provided contained a section on worker’s compensation; (4) the agent knew that worker’s compensation insurance is mandatory in California; (5) the agent’s staff calculated worker’s compensation premiums; and (6) the agent spoke to the insured about worker’s compensation insurance before she sent her insurance proposal.  Under these circumstances, the agent’s failure to advise of the necessity for worker’s compensation insurance and her failure to include it in the proposed insurance package breached the duty the agent assumed by holding herself out as an expert on the products necessary to satisfy the new business venture’s insurance needs.

 

For a copy of the decision, click here

 

By Toni L. Frain and Richard J. Cohen

 

http://www.goldbergsegalla.com/attorneys/Frain.html

http://www.goldbergsegalla.com/attorneys/Cohen.html

 

Special thanks to Lexis for allowing us to publish this decision.