T H U R S D A Y,    J A N U A R Y   2 7 ,   2 0 0 5 

Another Shoe Drops in Producer Comp Saga   |   CT Case: What Does it Say and What Happens Next?   |   NAIC Considers Controversial Section of Disclosure Model   |   Massachusetts Bankers Win One for the Feds   |   Drowning in L&H Paperwork? There’s Help.    |    Bills to Keep an Eye On   |   Big "I" National News    |

B R O K E R   F E E   I S S U E   U P D A T E
Another Shoe Drops in
Producer Comp Saga
CT AG Files Suit, Other Investigations Continue

Marsh & McLennan is back in the spotlight--but this time it’s not Spitzer, but Connecticut’s state attorney general who has filed the complaint. Connecticut Attorney General Richard Blumenthal filed a lawsuit on Jan. 21, 2005 alleging that Marsh & McLennan, Inc., Marsh USA Risk Services, Inc., and ACE Financial Solutions, Inc. engaged in unlawful conduct under Connecticut’s Unfair Trade Practices Act, resulting in the payment by ACE of undisclosed fees to Marsh.

In summary, the lawsuit accuses Marsh and ACE of actively concealing information regarding the payment of incentive compensation by ACE to Marsh to induce Marsh to place certain Connecticut state insurance business with ACE, thereby elevating the price of insurance for the policyholders and creating potential and actual conflicts of interest with clients.

The allegations in this lawsuit are different from the claims made against Marsh in the lawsuit filed on Oct. 14, 2004 by New York Attorney General Eliot Spitzer. In that suit, the alleged improper practices were bid-rigging and steering of business by a broker to carriers offering the broker higher fees. In this case, there are no specific allegations of steering, though some may consider it to be implied by Marsh’s designation of ACE as the preferred market; and there are no allegations of bid-rigging. Common to both lawsuits are allegations of undisclosed compensation received by brokers for insurance transactions, though the payments arise in different ways. 

Remedies sought against Marsh for the acts alleged in the Connecticut lawsuit include requiring Marsh and ACE to submit to an accounting to determine the amounts improperly paid to them, actual damages, punitive damages, costs of investigation and prosecution (including reasonable attorneys’ fees) and any other appropriate equitable relief.

In other producer fee issue developments, Marsh is at the heart of another legal proceeding, this one brought on by a Massachusetts trial lawyer. Robert Bonsignore of the law firm Bosignore & Brewer filed a civil suit Tuesday in Boston against Marsh, Ace Ltd., American International Group, MetLife and The Hartford Financial Services for alleged kickback schemes. The suit is seeking class action status.

In other state news, the North Carolina Department of Insurance stepped up its investigation this week. The department opened up a criminal probe Jan. 21 into the activities of several insurance companies and brokers.

In October, the department sent letters to more than 6,000 insurance companies and brokers asking them if they had participated in bid rigging. “We went into this with a very open mind. Unlike what was covered in New York, we didn’t have any smoking guns,” department spokeswoman Chrissy Pearson told BestWeek. “We have received responses from some that gave us details that warranted a follow-up.”

The department declined press inquiries about which companies are named in the probe or what violations allegedly occurred because it is a criminal investigation. Pearson did tell The Charlotte Observer that “fewer than a dozen” companies currently are included in the probe.

Stay tuned to IN&V for more updates as all of these situations develop. | T O P |

B R O K E R   F E E   I S S U E   U P D A T E
CT Case: What Does It Say
and What Happens Next?

Connecticut Attorney General Richard Blumenthal filed a lawsuit in Connecticut state court Jan. 21, 2005 against Marsh & McLennan, Inc., its wholly owned subsidiary, Marsh USA Risk Services, Inc. (collectively “Marsh”) and ACE Financial Solutions, Inc

According to the complaint, the facts giving rise to the lawsuit are as follows:

Around April 10, 2001, the Connecticut Department of Administrative Services (“DAS”) sought proposals from insurers to underwrite a loss portfolio program for the state’s worker’s compensation claims. To assure that potential insurance brokers were thoroughly vetted, the DAS prepared a Request for Qualification seeking detailed information from potential brokers, including a disclosure of the level of commission the broker expected to receive, both in dollars and as a percentage of premium. Marsh was one of two brokers that responded to the Request for Qualification, and it initially sought compensation on a percentage of premium basis that would have generated commission exceeding $1,000,000. The DAS rejected this approach, and following negotiations, Marsh agreed to accept a flat fee of $100,000. During this time, Marsh is alleged to have represented that its “guiding principle is to consider our client’s best interest in all placements….and we represent them in negotiations. We don’t represent the [insurance companies.]”

The DAS then prepared a Request for Proposal (“RFP”) for the two responding brokers. The RFP directed the brokers to identify the markets they intended to secure quotes from and specified explicitly that the successful broker would be paid a flat commission of $100,000 by the state. The DAS identified the segregation of the broker’s commissions from the cost of the insurance as a material element of the transaction, and amended the RFP accordingly.

Marsh identified ACE as the most preferred market, and was authorized by the DAS to seek a quote from ACE. Marsh did not advise the DAS that on November 6, 2001, before the insurance was bound, ACE was reported to have suffered substantial losses due to the Sept. 11, 2001 terrorist attacks, and, according to the other broker bidding on the business, a Morgan Stanley Analysis Report was issued that stated, “All Rating Agency’s [sic] Standard & Poors, Moodys, Fitch, have taken action on ACE & issued a ‘URN’ – under review with Negative Implications.” Marsh never informed the DAS of any change in ACE’s status.

On Oct. 31, 2001, the ACE bid was provided to the DAS, and specified it was “net of brokerage commission.” After Oct. 31 and before completion of the transaction, Marsh began negotiations with ACE to the effect that if ACE wanted more of this type of business, it would need to pay Marsh a contingency fee on this deal. On Dec. 3, 2001, a Marsh manager emailed the Marsh New York office that ACE agreed to pay a $50,000 contingency fee, and included with the fee from ACE was a confidentiality agreement. An internal email was subsequently generated by Marsh, which, according to the complaint, was an obvious effort to cover-up prior emails on the ACE payment, claiming that the “[d]iscussion with ACE on incentive/contingency payment commenced after deal was completed/bound/paid.”  Neither Marsh nor ACE ever informed the DAS about the contingency fee.

The filing of the lawsuit started the formal process of proving the allegations in it to be true or false. Each side will have the opportunity to obtain and review the evidence and assert its position through legal documents filed with the court. If the matter is not resolved through an agreement by the parties or dismissal, it will proceed to trial.

Since the lawsuit was filed in Connecticut state court, its outcome can have a binding effect only on brokers and insurers doing business in Connecticut. Any speculation about its outcome, especially without access to all the evidence and facts, is conjecture. IIABA will monitor the progress of the lawsuit and provide updates about its key developments.

The issues underlying the lawsuit have gotten attention from the regulators of many other states as well as Congress. IIABA will continue working on these issues at the state and federal levels.

In the interim, IIABA continues to recommend that insurance brokers review their business practices to assure they are in compliance with applicable laws. They also can choose to adhere to the  IIABA Policy Regarding Broker Placement Service Agreements.
| T O P |

P & C   T R E N D S
NAIC Considers Controversial
Section of Disclosure Model
Proposed subsection would impose disclosure
requirements on all agent and broker transactions.

When the National Association of Insurance Commissioners approved its producer compensation disclosure model law Dec. 29, it deferred action on several controversial items. One of these issues was a proposed Subsection (B), a controversial provision that would have imposed new and unprecedented disclosure obligations on every insurance transaction involving an agent and broker. Instead of taking action on this item when considering the broader model, regulators decided to study that provision and other potential expansions of the model over a three month period.

If adopted, Subsection (B) would require that:

An insurance producer must disclose the following, if applicable, to a customer, prior to the purchase of insurance:

(1)        That the producer will receive compensation from an insurer or other third party for the sale;

(2)        That the compensation received by the producer may differ depending upon the product and insurer(s); and

(3)        That the producer may receive additional compensation from an insurer or other third party based upon other factors, such as premium volume placed with a particular insurer and loss or claims experience.

Although the NAIC model was adopted less than one month ago (and has not yet been implemented in any state), there are some regulators who want to impose even greater and more onerous obligations on insurance producers. Some of the proposals are well-intention but misguided, and others evidence an utter misunderstanding of the realities of the insurance marketplace. IIABA is working closely with the NAIC to enhance, revise and clarify the existing NAIC model and is weighing in on proposed expansions of the model.

IIABA opposes any expansion of the model law, and the association recently submitted formal comments to the NAIC concerning the model, proposed Subsection (B) and related issues. Here is a portion of IIABA’s letter to NAIC President Diane Koken:

“The provision, which has the broadest possible scope, would impose unnecessary generic disclosure obligations on every insurance agent and broker in the country and offer questionable benefit to consumers in the process. No rationale, justification or need for this subsection has been presented, and we urge the nation’s insurance commissioners to reject the application of these needless costs and burdensome new requirements to the hundreds of millions of insurance transactions that take place every year. Proving compliance to regulators would require fundamental changes in business operations that would likely, among other outcomes, reduce a producer’s ability to proactively respond to consumer needs. Compliance is also complicated by the fact that the proposed subsection overlaps with existing provisions in the model. IIABA supports efforts to establish greater transparency and disclosure in brokerage transactions, but we oppose any attempt to indiscriminately burden the entire producer community with such dubious and costly requirements.

“The consideration of the proposed subsection is also very premature. The underlying disclosure amendment was adopted only three weeks ago and has not been considered by any jurisdiction, yet some are already suggesting that it be expanded. The model, which was unfortunately rushed to completion on Dec. 29, is already burdened by its overly broad scope, imprecise nature and a lack of clarity—and the addition of new onerous and unwarranted provisions will only add to the challenge of securing legislative enactment at the state level. The adopted disclosure amendment still needs significant clarification and revision, and the task force should start first with the items already included in the model and address the issues and concerns that IIABA has raised in previous correspondence before moving on to new provisions.

“Finally, we understand that some policymakers have also suggested that the NAIC model include a statutorily-created fiduciary duty for brokers to their clients. Such a requirement may sound reasonable at first blush, but the inclusion of such a provision is very misguided. This type of provision is entirely unprecedented, does not establish the type of bright-line rules that are needed, and confuses and contradicts the existing common law and contractual obligations of insurance producers. Its addition would not establish regulatory clarity in any way and would only result in extensive litigation. For these reasons, we also urge the NAIC to reject this and similar suggestions.”

Stay tuned to future issues of IN&V for updates.

For more information, contact Wes Bissett (wes.bissett@iiaba.net), Big “I” senior vice president of government affairs and state relations. | T O P |

V I E W :   P & C   T R E N D S
Massachusetts Bankers Win One for the Feds
What does the ruling mean for agents?

In case any of you missed it, there was a banks-in-insurance victory of potentially dramatic proportions rendered Jan. 10, 2005 by the U.S. District Court in Massachusetts. Is this latest decision yet another step toward bankers finally being able to fill the holy grail of one-stop financial shopping? It is difficult to say, but should the case hold up and the results be duplicated in other jurisdictions, the banks appear to have assured a clear path toward doing the broader insurance business much as they do credit life insurance, and state law will have a hard time getting in the way.

At issue is the extent to which states may regulate the sale and marketing of insurance products by financial institutions. Some jurisdictions have few requirements governing such practices, but many others have previously adopted a series of protections designed to prevent coercive sales practices by banks to ensure a level playing field for all insurance producers. The landmark Barnett Bank Supreme Court case and the Gramm-Leach-Bliley Act of 1999 generally allowed banks to engage in insurance sales, but states still retained the right to regulate in this area so long as they do not “prevent or significantly interfere” with those activities. The judge in this case said the state went too far. 

What did the bankers win? Essentially, the Massachusetts Bankers effectively used federal preemption as a club to beat back several sections of Massachusetts consumer protection law that makes doing the insurance business less expedient for banks. Federal preemption is a somewhat complicated legal concept when it impacts issues of insurance but it is safe to say that, in this case, the banks where holding the federal “trump card” when the decision was delivered.

The sections debated in court are part of the Massachusetts Consumer Protection Act Relative to the Sale of Insurance by Banks. That set of laws was used to (i) bar referrals of bank customers by unlicensed employees unless the customer asks; (ii) forbid banks from paying unlicensed, rank-and-file employees for referrals; (iii) make banks wait to chase insurance sales until after loans are approved; and (iv) require a physical separation between the traditional and insurance areas of a bank (with some exceptions). If you want the decision, email me, and I will send it to you. It is interesting reading.

According to the court, these elements of the Massachusetts law were “significantly interfering” with national banks’ ability to sell and market insurance and were preempted as a result. The bankers claimed the Massachusetts law increased the administrative costs associated with the bank insurance business and just made it harder for banks to do insurance than the Massachusetts Bankers Association thought it should be. Some observers disagree with the court’s articulation of the legal standard, and the case may be appealed.

Wondering what to make of this? As they say, “it’s complicated.” I do take solace in knowing the Big “I” national and states have veteran leadership in CEO Bob Rusbuldt in dealing with the banks-in-insurance issue. In addition, the national association’s Office of General Counsel and our “Top Ten” lobbying team on Capital Hill are acutely aware of the decision and are working with the Big “I” Massachusetts state association in determining the best steps to protect independent agent interests. Currently, the Massachusetts Big “I” is waiting to hear whether an appeal will be filed by the state. If so, IIABA and the Mass Big “I” will likely be filing amicus briefs as well.

Next week, in light of this decision, we will share some perspective on banks-in-insurance. In 1991, I did a study for the then Independent Bankers Association of America on expanded bank insurance activities. Reflecting on the ensuing years and what has occurred is interesting, if not surprising.

Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big “I” Advantage, IIABA’s for-profit subsidiary. | T O P |

V I E W :   L & H   T R E N D S
Drowning in L&H Paperwork? There’s Help.

Plato said “know thyself,” but it’s doubtful that he ever had to apply the adage in the context of sales. Have you ever had a tough day at the office and muttered to yourself, “Why did I get into this business?” Most l-h insurance agents are in this field for two reasons: They enjoy the flexibility of determining when they work and who they work with, and they like solving problems by developing creative solutions to their customers’ needs. No doubt, if you’re in this business, you like the unconformity of it.

So what is the universal single complaint? Don’t fall for the easy answer of rejection. Most sales professionals understand that no one bats a thousand and have enough confidence to deal with negative outcomes. The No. 1 problem is the paperwork. And it continues to increase rather than decrease. Not only do agents have to deal with medical apps, but the onslaught of disclaimers and disclosures, privacy notices and other stacks of paper continue unabated. This makes the sales process more time consuming and cumbersome. Is there any hope?

The good news is that customer relationship management (CRM) databases and the use of technology—e-mails, PDAs, heck, even GPS systems to find customers’ office— have helped in trying to keep up with the paperwork. But, therein lays the trap. All of this technology should be a means to serving our customers more efficiently—but it is easy to fall prey to it becoming an ends.

When I started in insurance sales, I remember walking around the large agency’s halls and seeing cans of STP motor oil on agents’ shelves and desks. I thought to myself, “These people are really focused on car maintenance.” I quickly found out that STP stood for “see the people,” and the cans were intended to remind agents that they really made their money—and their greatest utility—by getting out in front of the customer, not hibernating in the agency doing service work.

Successful agents do not perform every task from A-Z. It’s not efficient. It’s the very reason that companies add employees under the marginal utility theory that you don’t have $50-an-hour people doing $10-an-hour tasks. Having said that, we all find ourselves at the copy machine once in a while, but routinely it’s important to configure or reconfigure duties so that you focus on the things that drive production—calling and seeing customers—and not get caught up in sales work.

So what does Plato have to do with this? Well, most sales professionals enjoy dealing with people. The reason you work in an agency is to share the work load. It is the agency’s responsibility to help you (hence the catchy title CSR, or Customer Service Representative), and it is your responsibility to drive sales for the agency.

With the Super Bowl around the corner, it’s noteworthy to acknowledge that every team needs a quarterback, offensive line, running backs and receivers to get points on the board. Find out what your position should be in the agency and everyone will benefit.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for IA magazine. | T O P |

O N   T H E    H I L L
Bills to Keep an Eye On

Two legal reform bills appear to be moving along quickly in the new Senate session. Senate Judiciary Chairman Arlen Specter reportedly planned to introduce legislation this week to create a $140 billion asbestos trust fund, amidst questions as to whether either industry stakeholders or labor unions would embrace the proposal, and Majority Leader Bill Frist (R-Tenn.) is hoping to move class-action legislation to the floor the week of Feb. 7.

On the $140 billion asbestos trust fund, it is reported that business groups have agreed to the number, but that labor unions continue to press for a higher figure. Specter reportedly hopes to move the bill through the Judiciary Committee for a Senate floor vote in February. The Big “I” joined with several other trade associations this month to applaud Specter for moving quickly on this legislation, but also to seek additional protections added to insulate insurers and manufacturers against potential insolvency and to avoid putting asbestos cases back into the court system.

The Big “I” and its industry partners had two chief concerns about potential asbestos legislation. The first was that that the legislation’s early drafts contained no aggregate payment levels, which would make it impossible to determine the cost of the proposed trust fund. Insurers are pledged to pay in a maximum of $46 billion to the trust fund. The industry partners expressed concern about paying these massive contributions into the trust fund when the proposed legislation leaves the door open for a potential return to the legal system.

Additionally, the Big “I” and other associations want to see provisions that would avoid the reversion of claims to the courts. The hope is that any legislation clearly would terminate the litigation system and provide for timely implementation of the trust fund, to avoid any potential reasons for a return to the tort system. This is important not only to provide fairness and certainty to those paying compensation, but also to provide timely justice to individuals who truly have been injured.

On class action, the Big “I” is supporting the proposed legislation, which essentially mirrors a bill that was set to pass the Senate last year before a deal between Senate Republicans and Democrats fell apart at the last minute, and the bill was withdrawn under the threat of a Democratic filibuster. The Big “I” continues to closely monitor both efforts in the Senate.

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations.  
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