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home / insurance / in the media

The San Francisco Chronicle
Oct 21, 2004

by Kathleen Pender

Insurance probe widens

California Insurance Commissioner John Garamendi on Wednesday proposed broad regulations that would require brokers and some agents to disclose all compensation they receive from insurance companies and to recommend to their clients the best available policy, regardless of which insurance company is the issuer.

Garamendi is following in the footsteps of New York Attorney General Eliot Spitzer, who last week sued Marsh & McLennan, alleging that the nation's largest insurance broker steered business clients to insurers that paid it compensation above the normal commissions. Spitzer said Marsh brokers also obtained fake bids from other insurance companies to make it look as if they had solicited competitive bids.

Garamendi said regulators have uncovered a "pernicious and widespread practice" in which customers "from the largest corporations to the smallest mom and pop... have been denied the very best insurance available to them."

It's not clear to what extent Garamendi's proposed rules would help consumers. In California, most major home and auto insurers sell through agents, who represent and owe their allegiance to one or more insurance companies, not through brokers, who are legally obligated to act in the customer's best interests.

The proposed rules would apply to brokers and any agent "who represents, purports to represent or allows a client reasonably to assume he or she represents a client in an insurance transaction." Violators could be fined up to $10,000 per incident and have their insurance license suspended or revoked.

Some insurance trade groups questioned whether Garamendi can expand the definition of a broker to include agents and then impose the new rules on them.

Insurance group has doubts

"This regulation is unprecedented in substance and in scope," said Steve Young, general counsel for Insurance Brokers & Agents of the West. "We support the commissioner's desire to make more clear the broker's compensation. But we don't believe the commissioner even begins to have the legal authority to promulgate this regulation."

Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, says the proposed regulations don't go far enough. "If we really want to address the problem, make sure consumers are getting the best deal, we need to go far beyond just exposing the conflicts of interest. We need to end them," he said.

After a public comment period, Garamendi must submit his proposal to the state Office of Administrative Law, which determines whether regulations comply with state law.

The new head of the office is Bill Gausewitz, whose previous job was supervising lobbyists in Sacramento for the American Insurance Association. Gausewitz said that although he still has friends in the insurance industry, nothing would prevent him from making an impartial ruling on Garamendi's proposal.

Garamendi said he and Spitzer began probing insurance sales practices after they each received a letter in February from the Washington Legal Foundation, which says it is dedicated "to preserving a free and open marketplace."

The foundation urged the commissioner to investigate and consider taking regulatory against placement service or profit-sharing agreements, in which a broker steers clients to insurance companies that pay the broker undisclosed or poorly disclosed residual compensation.

Conflict of interest arises

It said the practice creates a conflict of interest that can result in clients paying more for coverage or receiving fewer benefits.

Garamendi said Spitzer used his subpoena powers to uncover "some extraordinary information" that led to last week's charges and guilty pleas from two insurance executives who are expected to testify in future cases.

Spitzer said his investigation of the insurance company, like his one into mutual funds, will extend beyond Marsh & McLennan and the four other big insurers implicated but not charged in his suit.

Garamendi said he chose not to issue subpoenas in the case. Instead, his office focused on the proposed regulations and on a civil suit Garamendi said he plans to file next week.

"We didn't want to double up and waste our resources," he said. "We headed down the same track (as Spitzer) but on two separate paths."

Garamendi reportedly will hire Lerach Coughlin Stoia Geller Rudman & Robbins, the San Diego law firm best known for securities class-action suits.

The Lerach firm has already filed securities-fraud suits against several companies implicated in Spitzer's complaint, including Marsh & McLennan, American International Group, Ace Limited and the Hartford Financial Services Group. All of their stocks have dropped sharply since Spitzer's filing.

The National Association of Insurance Commissioners also held a conference call Wednesday to say that state insurance regulators are investigating the charges that have arisen and are considering collaborative action.

"While most of the publicity has centered on abuse in the sale of commercial lines policies, it is important to note that regulators intend to look closely at the sales of personal lines policies as well, including the sale of employee benefits packages through the workplace," said Pennsylvania Insurance Commissioner Diane Koken, the association's president.

In the meantime, what can consumers do? Know whom you are dealing with and how he or she is compensated. And shop around.

Some firms, such as Geico, USAA and 21st Century, have no agents and sell directly to consumers.

In California, the largest home and auto insurers -- State Farm, Farmers and Allstate -- sell through exclusive agents who don't get fees for steering business to a particular company because they represent only one.

Many other large firms, such as Progressive, Safeco, Hartford and Chubb, sell through independent agents who may represent more than one company, said Dan Dunmoyer, president of the Personal Insurance Federation. These agents represent and are paid by the insurance companies.

Agents are required "to get you the best product to fit your risk profile," said Dunmoyer. But that does not mean they have to get you the cheapest policy.

"Price is a factor, but product and service is what we provide," he said. He also pointed out that agents sell policies at rates approved by the Department of Insurance.

Insurance brokers are a different breed who have a fiduciary duty to work in the best interest of the customer. They typically charge the customer a fee, which must be disclosed. They also may be paid by the insurance company.

In California, insurance salespeople obtain a dual license, which means they can operate as a broker in some situations and as an agent in others. But they are supposed to disclose to the customer in which capacity they are serving. It's no wonder that consumers are often confused.
E-mail Kathleen Pender at

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