New Column

I was asked recently by Steve Acunto, the publisher and editor of Insurance Advocate magazine to write a regular column on developing issues, particularly on the legislative and regulatory fronts.  The first installment of my column, Insight, appears in the May 21, 2012 issue of IA.  The column, which will be a regular feature of IA, can be viewed at http://www.insurance-advocate.com.  In his introduction, Steve stated:

In this issue of the Insurance Advocate Peter Bickford’s column premieres on page 12. Peter is a longtime, rather astute observer of the business, whose work we have featured with great pride over the years. We believe that, in keeping with the Insurance Advocate’s mission to observe regulation and legislation that affect the progress of insurance, as well as to look out for the livelihood of independent insurance agents and brokers, always seeking to improve the system as it now exists, we are advocates for good insuring practice on all sides. Peter Bickford has earned many stripes in this very same advocacy sphere and we welcome him to our pages.

Now all I have to do is deliver the goods . . .   regularly. . .   No pressure!

I look forward to your comments and suggestions for items of interest that you believe should be explored.

Contingent Commissions – Legal After All?

When New York Attorney General Eliot Spitzer (now Governor Spitzer) went after the major insurance brokerage firms for bid rigging a few years ago, he also attacked contingent commissions as part of the scheme to direct business, characterizing these payments as equivalent to kickbacks. In the subsequent settlements with the major brokers, the brokers agreed to forego contingent commissions in the future, casting a pall over the practice by the entire brokerage community, not just the majors.

Now a recent Appellate Division case, Hersch v. DeWitt Stern Group, Inc. (2007 NY Slip Op 06567, App. Div. 1^st Dept., Sept. 6, 2007), has focused attention again on the propriety of contingent commissions. In the Hersch case, plaintiff had sued his broker for failing to obtain certain coverages, and several of the causes of action were based on breach of fiduciary duty for, inter alia, failing to disclose the existence of a contingent commission agreement. The Court found that the fiduciary duty causes of action should have been dismissed because contingent commissions are not illegal and, absent a special relationship, defendant had no duty to disclose the existence of the contingent commission agreement.

The Court based its finding that contingent commissions are not illegal on a 1985 Court of Appeals decision, Amusement Bus. Underwriters v. American Intl. Group (66 NY2d 878). The Court of Appeals in Amusement Bus. Underwriters, however, did not specifically hold that contingent commissions were legal. It was interpreting the terms of a contingent commission agreement, and the issue of the legality of the agreement does not appear to have been before the Court.

The Hersch Court’s finding that the broker had no duty to disclose the contingent commission agreement, also seems to fly in the face of a regulatory requirement for disclosure. Circular Letter 22 issued by the New York Insurance Department in 1998 imposes a regulatory requirement that all special or extra compensation arrangements between carriers and a broker must be disclosed to customers. The Hersch Court makes no mention of this requirement.

Given the significance of the issues it roils, the Hersch decision is remarkably short (three paragraphs). We will have to wait and see if the decision is appealed, but until the Court of Appeals rules otherwise, it appears that contingent commissions can once again be discussed openly in polite circles – at least in New York’s First Department.

Agencies and Arbitration

In a recently published article, "Is Arbitration a Trap for The Unwary Insurance Agency?", February 2007, I warn that arbitration does not provide a level playing field to insurance agencies in disputes with carriers, and urge the brokerage and agency community to expand the pool of qualified and available arbitrators knowledgeable on agency issues.

The impetus for the article was an arbitration between an agency with a small but profitable and fully reinsured program and the insurer of the program. The issues before the arbitrators included the circumstances of the termination and the treatment of the agency following termination. The arbitration resulted in an award by a majority of the three arbitrators denying the agency's claims, but without any explanation. The dissenting arbitrator, however, issued an unusual written dissent stating that the majority had failed to apply custom and practice in its decision, and misapplied the law. As I note in the article, this dissent should be required reading for all insurance agencies and program managers concerned with resolving disputes with their carriers. Because of its importance, a copy of the award and dissent in The Garn Group v. Arch Insurance Company dated December 7, 2006 can be accessed in pdf format through this link.