Court ruling re-fuels contingents debate

The ruling will be welcomed by major U.S. and international insurance buyers who have become increasingly concerned about the ability of the brokers to cancel agreements reached to ban contingent commissions. The agreements were originally sparked by the campaign against the practice by former New York Attorney General Eliot Spitzer in 2004. In February, The Risk and Insurance Management Society (RIMS) announced its dismay at a decision by the New York Insurance Department (NYID) and Attorney General to allow the nation’s leading insurance brokerage firms – Aon, Marsh, and Willis – to resume accepting contingent commissions. This followed an earlier ruling in Illinois in 2009 that released Arthur J. Gallagher and Company from its agreement.hideRIMS said that the investigations, admissions, and fines that led to the agreements in 2005 proved that these practices can be, and were, manipulated at the expense of the insurance consumer. “Without strong consumer protections in place, RIMS has strong reservations about a policy that permits contingent commissions again, and this development illustrates why RIMS so vigorously fought for a stronger rule,” stated the risk managers’ association earlier this year. “RIMS had hoped that in the absence of a contingent commission ban, brokers would be required to provide full compensation disclosure, allowing the consumer to decide whether the broker is acting in their best interest,” said Scott Clark, director of RIMS External Affairs Committee and risk and benefits officer for Miami-Dade County Public Schools, after the New York decision and the introduction of a weak consumer protection standard by the NYID. “Unfortunately, the final regulation does not live up to that standard, and instead the burden to request full disclosure has been placed squarely on the consumer,” he added. RIMS urged Aon, Marsh, and Willis to commit to full compensation disclosure above and beyond the recent NYID regulation. “Such action would go a long way toward building trust and strengthening the relationship between broker and purchaser. RIMS also reiterates its call that the New York Insurance Department revisit its producer compensation regulation, and open it up to another comment period following the most recent changes,” stated the association. It also encouraged other states to ‘go further’ with their regulation and make a strong effort to enact full mandatory disclosure requirements that would protect the insurance consumer. RIMS will presumably be delighted with the news from Philadelphia. According to Reuters, the decision was made by the US Third Circuit Court of Appeals in Philadelphia and effectively reinstated antitrust and racketeering claims over alleged bid rigging that focused on market leader Marsh & McLennan Cos Inc. The ruling also reinstated racketeering claims against some brokerages, as well as some claims under New Jersey law, said the news agency. It was only a partial defeat for the brokers and 13 insurers also included in the case though. The report said that the three-judge panel upheld the rest of a September 2007 decision by U.S. District Judge Garrett Brown in Trenton, New Jersey that had dismissed the lawsuit. The brokers were accused of colluding with the insurers to steer clients to particular insurers in exchange for payments. In February of last year Marsh agreed to pay $69 million to settle its part of the class-action case. It had already agreed to pay $850 million to settle Mr. Spitzer's charges in January 2005. RIMS has focused its attention on Marsh and Aon, as Willis maintains that it will not reintroduce contingent commissions and has worked furiously since the RIMS conference in April to establish the fact as a competitive advantage. Willis, for example, recently sponsored the publication of a 16-page report, written by law firm Edwards Angell Palmer & Dodge, that it said further highlights the fundamental conflict of interest that contingent commissions create. Joe Plumeri, Willis Group Chairman and CEO, said in his introductory comment to the White Paper: "Willis has long opposed contingents because we believe they are at odds with the obligation retail brokers have to their clients to get them the best terms, conditions and price, and to advocate for them when they have a claim. It's important for insurance buyers to know about the conflicts of interest created when insurance companies pay retail brokers bonuses for increasing premium volume and profitability. Not only do contingents have the potential to affect the loyalty and service insurance buyers get from their brokers, they also negatively impact the image of our industry." Willis’ education campaign is focused on a website, www.ClientsBeforeContingents.com, which it says aims to combat apathy and increase awareness among insurance buyers about the dangers of contingent commissions. In stark contrast, towards the end of July, Aon issued a statement that outlined its approach to market remuneration and contingent commissions. The firm stated that it will accept various forms of compensation, which may include supplemental and/or contingent commissions in areas of the world where it is allowed. RIMS said that it was ‘disappointed’ with Aon’s decision. “RIMS urges Aon to join other large brokers in agreeing not to accept contingent commissions,” said Mr. Clark last month. “Ultimately, we would like to see the insurance industry as a whole adopt practices that place the broker in a position that best serves purchasers of insurance.” “RIMS has always maintained the position that contingent commissions should be universally banned and views Aon’s intentions as a step backwards with regard to the level of service it provides to its clients,” stated the association. “RIMS will continue to call upon all brokers to refrain from accepting contingent commissions, as they pose an inherent conflict of interest and interfere with the relationship of trust between the broker and insurance consumer, regardless of the nature of the client or the intermediary,” it continued. Aon’s statement followed a statement from Marsh that said it would refrain from accepting contingent commissions in transactions with U.S. clients served by its core broking operations. But it also said that it would continue to accept enhanced commissions and fees for services from insurers. The Marsh & McLennan Agency L.L.C. and Marsh Consumer’s affinity, sponsored program and personal lines businesses will accept contingent commissions, said the broker. Terry Fleming, president of RIMS and director of the division of risk management for Montgomery County, Maryland, said that RIMS was pleased that Marsh had agreed not to accept contingent commissions. He also called on the insurance industry to develop alternative forms of compensation that do not place the broker in the position of a conflict of interest. RIMS reiterated its belief, however, that contingent commissions impose an inherent conflict of interest upon the insurance buying transaction, ‘regardless of the nature of the client or the intermediary’, and urged Marsh to adopt a global ban. “RIMS recognises that many of its members regard enhanced commissions and contingent commissions as one in the same. To that end, RIMS acknowledges Marsh’s efforts to collect enhanced commissions on a flat fee, rather than a volume basis, and it encourages Marsh, its carrier partners and its clients to continue having open and frank discourse over the nature of such compensation, how it is collected and disclosed,” added the association.

Court ruling re-fuels contingents debate

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