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Big “I” National News

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Spitzer Resigns in Personal Disgrace
New York’s governor steps down after ties to prostitution ring become public.

Eliot Spitzer resigned yesterday as New York’s governor following the public revelation earlier this week of allegations he had encounters with high-priced prostitutes, most recently at the venerable Mayflower Hotel in Washington, D.C.  The news of his alleged involvement with prostitutes shocked not only the residents of New York, but also the business and insurance industries, where he built his reputation as a relentlessly aggressive, no-nonsense prosecutor. The resignation will be effective on March 17.

Spitzer announced his resignation with his wife by his side as he read a prepared statement.

“I am deeply sorry I did not live up to what was expected of me. To every New Yorker, and to all those who believed in what I tried to stand for, I sincerely apologize,” he said.

He went on to say, “Over the course of my public life I have insisted, I believe correctly, that people, regardless of their position or power, take responsibility for their conduct. I can and will ask no less of myself. For this reason I am resigning from the office of governor, and at Lt. Gov. David Paterson’s request, the resignation will be effective on Monday, March 17, a date that he believes will permit an orderly transition.”

Like his resignation statement, Spitzer’s statement at a press conference on Monday also did not address any of the allegations swirling around him. His statement included an apology for acting “in a way that violated the obligations to my family and that violates my -- or any -- sense of right and wrong.” He also acknowledged that, “I have disappointed and failed to live up to the standard I expected of myself.”

The scandal broke when federal prosecutors released an affidavit from an FBI agent detailing an encounter with “Client-9” and a prostitute identified only as “Kristen” from the Emperor’s Club VIP, a prostitution service with more than 50 call girls available for hire to high-paying clients. Client-9 is not identified by name in the affidavit, but is widely believed to be Spitzer.  

The affidavit includes details of calls made by Client-9 to arrange for Kristen’s trip from New York to Washington, D.C. for an encounter with him on Feb. 13. It also details payment for her Washington-New York round-trip train ticket, cab fare, travel time and hotel room and $4,300 for the encounter and credit for future services. The day following the meeting, Spitzer appeared before lawmakers in Washington to discuss problems facing the bond industry.

Spitzer’s alleged involvement with the Emperor’s Club VIP was discovered after a bank he maintained an account at filed a “suspicious activity” report with federal authorities.  Such reports are required by the federal Bank Secrecy Act and are mandatory for transactions of $10,000 or more, but they also are filed routinely for transactions that banks consider to be suspicious.  In this instance, it has been reported that Spitzer’s bank was concerned that he might have been involved in a money laundering scheme involving transactions intentionally kept below $10,000 to skirt the reporting requirement. Federal authorities are believed to have linked Spitzer to the Emperor’s Club VIP by following the money trail.  

Spitzer served as New York’s attorney general for eight years prior to becoming governor in 2007. During his tenure as attorney general, Spitzer was dubbed by some as the sheriff of Wall Street for his pursuits to eliminate corporate corruption in the financial services sector. Dating back to 2002, he conducted investigations and prosecuted household names on Wall Street for their alleged use of tainted research. Another high-profile case that is still pending involved his 2004 charges against Dick Grasso for excess compensation while serving as head of the New York Stock Exchange. And notably, his 2004 investigation and charges against Marsh & McLennan for bid rigging and irregularities in connection with producer compensation practices led to a series of investigations and lawsuits, many of which have been settled, involving some of the largest insurance companies in the country, including AIG, Zurich, Liberty Mutual, Travelers, The Hartford, and Chubb. Spitzer’s investigation of the insurance industry led to a number of resignations by senior insurance company executives, including the powerful Maurice “Hank” Greenberg, former Chairman and CEO of AIG. 

Spitzer earned a reputation among some as being an inflexible crusader who was relentless in his zeal to coerce compliance with his demands by striking fear in his targets. Others criticized his efforts to force broad-based reform on industries whose practices he disliked, even when they were regulated by federal law, which was beyond his purview as a state prosecutor. 
The allegations that Spitzer hired prostitutes have elicited comments from many targets of his past prosecutions who are highly critical of his approach while serving as attorney general. They have said they have no sympathy for him in light of the havoc, cost and pain they feel he inflicted on them. They also have said they consider his behavior stunningly hypocritical in light of his prior prosecution of prostitution rings and his public support last year of state legislation strengthening penalties for sex trafficking.

The government investigation is being handled by public-corruption prosecutors in the U.S. attorney's office in Manhattan. And, there currently are no deals between Spitzer and the U.S. attorney, as some speculated might exist as the quid pro quo for his resignation. 

“There is no agreement between this Office and Governor Eliot Spitzer, relating to his resignation or any other matter,” said U.S. Attorney for the Southern District of New York Michael Garcia in a March 11 statement.

Spitzer is being represented by Michele Hirshman of the high-powered New York law firm, Paul, Weiss, Rifkind, Wharton & Garrison. Hirschman has known Spitzer for nearly 20 years and served as first deputy Attorney General of New York shortly after Spitzer took office as New York Attorney General in 1998. 

Hirschman has her work cut out for her in leading the defense for Spitzer against a range of possible charges that could include “structuring,” which involves making payments in a way intended to improperly avoid triggering currency reporting requirements under the Bank Secrecy Act. 

There are many unanswered questions about this unfolding scandal, and it is uncertain when answers to those questions will be known. They include, among other things, if Spitzer will be indicted by federal authorities for his actions, and if so, the specific charges; if he will reach an agreement with prosecutors to avoid or settle criminal charges that may be leveled against him; what the terms of any such settlement might be and what will happen to his license to practice law.

Spitzer is a Harvard law graduate, with experience in private practice before entering the public sector. He is 48, married and has three daughters.

Debra Perkins (debra.perkins@iiaba.net) is IIABA vice president and general counsel; Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.

On the Hill

The NARAB Reform Act
NARAB II legislation would make non-resident licensing more efficient.

Earlier today Reps. David Scott (D-GA) and Geoff Davis (R-KY) introduced H.R. 5611, the National Association of Registered Agents and Brokers (NARAB) Reform Act, commonly known as NARAB II. The introduction of this bipartisan legislation by Scott and Davis is very good news for agents and brokers as it deals with the number one issue for many agencies --- the need to streamline the licensing process.

As agencies become larger, the inefficient non-resident licensing system only gets worse.  The average independent agency is authorized to operate in at least eight states, and it is not uncommon for small and medium-sized agencies to be licensed in 35 to 50 jurisdictions. Every agent in the country must satisfy only one set of resident requirements, but multi-state licensees are forced to comply with potentially 50 sets of nonresident rules. The current licensing system is so complex that many agencies are forced to retain expensive consultants or vendors in order to remain in compliance. Reform is long overdue and it has finally arrived in the form of NARAB II. 

The legislation is straightforward: insurance agents and brokers who are licensed in good standing in their home states can apply for membership to NARAB, which will allow them to operate in multiple states more easily. NARAB, a private, non-profit entity comprised of state insurance regulators and marketplace representatives, will serve as a portal for agents and brokers to obtain non-resident licenses in additional states, provided they pay the required state non-resident licensing fees and meet the NARAB standards for membership. Producers could remain licensed in the traditional manner, but those operating in multiple jurisdictions could choose to apply for NARAB membership and one-stop non-resident licensing. Therefore, membership in NARAB would be voluntary and would not affect the rights of a non-member producer under any state license. The legislation also deals with agency (entity) licensing burdens.

Congress already has endorsed this concept through passage of the Gramm-Leach-Bliley Act (GLBA) in 1999, which would have created NARAB if a number of states did not reach a certain level of licensing reciprocity. Although enough reciprocity was provided to avoid NARAB’s creation, it has become clear that the bar was not set high enough in GLBA, and follow-up legislation is necessary. An updated version of NARAB would provide this much-needed reform.

The bill is very deferential of states’ rights in a number of ways. First, NARAB II only applies to non-resident licensing, not resident licensing. Second, it only deals with marketplace entry not the day to day state regulation of insurance. Third, NARAB would not negatively impact state agent/broker licensing revenues. Finally, and most importantly, NARAB would not be part of, or report to, any federal agency and would not have federal regulatory power. 

The IIABA commends Scott and Davis along with their colleagues in the House who served as original cosponsors of this very important bill.

Tom Koonce (tom.koonce@iiaba.net) is Big “I” assistance vice president for government affairs.

P&C Trends

Pass or Fail
Conservative “think tanks” grade state insurance regulatory environments.

Last week at the spring meeting of the National Conference of Insurance Legislators (NCOIL) in Washington, D.C., the Heartland Institute and Competitive Enterprise Institute released their ranking of insurance regulation in the 50 states and the District of Columbia. The study gives California, Florida, Maryland, Massachusetts and North Carolina an “F” or failing grade. The conservative think tanks found Idaho, Illinois, Utah, Vermont and Wisconsin at the other end of the grading spectrum, giving them “A” grades. Perhaps most surprising is that the release of the study has been met with little controversy so far. But with the full report slated to be available soon, more may come of it in the coming weeks.



*Source: Property and Casualty Insurance, A state-by-state analysis of regulatory burden, By Eli Lehrer, senior fellow of the Competitive Enterprise Institute and The Heartland Institute.

One observation apparent when mapping the study’s rankings is that, with a few exceptions, the states with the “A” and “B” rankings are in the middle of the U.S, while the states with the “D” and “F” rankings tend to be toward the coasts. This may be due to coastal/catastrophe challenges and how they impact the nine factors evaluated by the study. These nine factors include: 1) the prevalence of state residual automobile and/or homeowners insurance markets; 2) the level of insurance market volatility as measured by automobile insurance company loss ratios; 3) the degree of market concentration; 4) the level of freedom in form regulation; 5) the amount of state control over insurer rates; 6) the availability of credit scoring as a rating factor and 7) the ability to use territorial rating.

The study’s author, Eli Lehrer, makes several interesting points about the philosophy behind the article. First, the intent is to assess the regulatory environment and not the regulators themselves. The letter grades are intended to evaluate the state’s laws and point to opportunities for reform. Second, consistent with general free-market philosophy of the two think tanks, is the opinion that insurance markets best accomplish their risk management function when insurers are facilitated in charging the rates they deem necessary and provide coverage forms they believe will be optimal. The study takes a scholarly approach of quantifying each of the seven criteria for each state to develop the letter grades and uses five case studies to share views on the future by looking at Florida, Illinois, Texas, Vermont and Louisiana. A PDF copy of the study can be downloaded starting March 14 at the Heartland Institute Web site, www.heartland.org.

Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage^SM and a licensed p-c agent.

In the States

Illinois Cracks Down on Certificates of Insurance
IIABA Establishes ‘certificates of insurance’ resource Web site.

In September 2007, the IIABA Board of Directors adopted a formal policy statement on certificates of insurance based on a white paper published by the Big “I” Virtual University (VU) in January 2007. Since then, several Big “I” state associations have taken the lead on addressing the issues outlined in the national policy statement. Most recently, the Professional Independent Insurance Agents of Illinois (PIIAI) worked closely with Illinois Insurance Director Michael McRaith who announced a statewide effort to enforce Illinois’ statutes regarding certificates of insurance.

“Certificates of insurance must clearly and accurately state the insurance coverage provided,” says McRaith’s memorandum. “Any certificate issued by an insurer, broker or producer that obscures or misrepresents the insurance coverage provided under the insurance policy is a violation of the Illinois insurance code and may subject the issuer to administrative penalties and/or license suspension or revocation.”

“Anything that is not actually stated in the insured’s policies cannot be shown on a certificate of insurance --- period,” says Chuck Schramm, a nationally known instructor and consultant on certificates and IIABA Virtual University faculty member. “Any notice provision which binds the insurer when such provision is in the policy is not in compliance.”

For example, if no endorsement has been added to the policies, the certificate cannot show either primary noncontributory or additional insureds. In addition, an indemnification agreement or any other non-policy language can’t be added to a certificate. There is no endorsement to include a contract’s indemnification clause in the definition of “insured contract.” Moreover, none of the preprinted language on the certificate may be deleted.

Producers found in violation may have their licenses placed on probation, suspended or revoked. In addition to suspension or revocation of a license a person may, after hearing, be subject to civil penalties of up to $10,000 for each cause of action.

Illinois is one of at least 20 states that have addressed a number of certificate issues by statute, regulation or insurance department directive. These issues include issuing certificates that appear to amend, alter or misrepresent policy language; reflect nonexistent policy requirements to notify certificate holder of cancellation or represent outright fraud. A complete listing of state laws, regulations and directives can be found on a new Web resource created by IIABA that is devoted to certificates of insurance and related issues. The cornerstone of this certificates of insurance resource section of the VU is the newly revised March 2008 “Certificates of Insurance: Issues and Answers” white paper. Also included is a listing of state laws and regulations governing certificates of insurance, representative case law, related articles, a Q&A section and a link to an audio podcast on errors and omissions and certificates of insurance.

By April 2008, the VU will be offering state associations a three-hour turnkey seminar that can be delivered locally, including seminar manual, PowerPoint presentation, instructor notes and supporting reference material. A 20 to 30-minute program with handouts and a PowerPoint presentation will also be available for IIABA members to present to clients, businesses and civic groups.

To access the VU’s certificate resource, click here.

Bill Wilson (bill.wilson@iiaba.net) is the Big “I” director of Virtual University.

VIEW: L&H Trends

March Madness
Don’t let competition get in the way of being a good agent.

While March is renowned for “coming in like a lion and going out like a lamb,” most people look forward to the first signs of Spring --- despite the month’s unpredictable weather.  For sports fans (and even non-fans) the month is synonymous with the NCAA basketball tournament, and the office pool that comes with it has become a great event that perplexes and frustrates many and ultimately pleases the very few winners. 

So what can independent insurance agents learn from this month? First, it’s a month of great enthusiasm and, with an even earlier calendar adoption of daylight savings time, daylight, which adds to the feeling of springtime. Second, if there is one universal quality Americans possess, it’s a sense of competition. We like to compete. It’s the basis of our culture, our economy and our nature. There is an insightful quote from Brooks Clark that says, “Good coaches teach respect for the opposition, love of competition, the value of trying your best and how to win and lose graciously.” While many insurance companies and agencies have sales competitions from time to time, in this age of increased scrutiny, when it comes to financial services, it’s important to review sales incentives in order to avoid unintended consequences. 

Twenty-five years ago, when I worked for an insurance company, I was responding to an inquiry from a life insurance policyholder when I experienced first-hand such an unintended consequence. I had received the service call because the agent who sold him the life insurance was no longer with the agency. The client said  he wanted to change the beneficiary on one of his life insurance policies. I was somewhat confused because the files indicated he had purchased four $25,000 whole life insurance policies on the same day. When I asked why he bought four policies on the same day, he said the agent had told him it made sense to have a separate policy for each beneficiary (his wife and three adult children) so there would be no confusion. I told him that it’s possible to list multiple beneficiaries on the same policy and that, barring a unique circumstance, he would have been better off with a single $100,000 life insurance policy since that was a threshold for a lower rate and he would save some meaningful premium dollars.

However, when I looked into the matter, it turned out that the agency had run a contest that was based on the number of policies sold, not on the amount sold and the agent had qualified for nice perks as a result. The policies were reissued at the $100,000 amount and the premium at the issue age refunded so the policyholder was held harmless, as if he had the higher face amount from day one. Of course, these situations are very rare --- especially in independent insurance agencies. And with compliance departments being even more vigilant, it’s doubtful that four separate policies would have been issued. But the lesson is that it’s great to foster competition, but just make sure that the outcome is what is in the best interest of the agency and the insured.   

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.