Fundamentals of Insurance Regulation: The Rules and the Rationale by Raymond A. Guenter & Elisabeth Ditomassi

Author:Raymond A. Guenter & Elisabeth Ditomassi [Guenter, Raymond A. & Ditomassi, Elisabeth]
Language: eng
Format: epub
ISBN: 9781634256896
Publisher: American Bar Association
Published: 2018-07-31T22:00:00+00:00

3. Disclosure of Commission Compensation

a. The Impetus for Reform

New York Attorney General Eliot Spitzer was renowned in the early 2000’s for being one of the most aggressive attorneys general in the country and a likely candidate for higher office. One of his most well-known prosecutions involved the insurance industry. With tremors felt across the industry, he ripped open the financial arrangements between some of the largest brokerage houses in the industry and large insurers. In the Liberty case, infra, the contingent commission arrangements between brokers and insurers came to the forefront and became the poster child for back-hand dealing in the industry at the expense and detriment of consumers. Although equally serious issues also were at play, such as bid rigging, this series of cases changed the landscape for certain commission arrangements and the underlying fiduciary duties associated with these arrangements.

Eliot SPITZER, the Attorney General of the State of New York, Plaintiff,

V. Liberty Mutual Holding Company, Inc., Et. Al., Defendants.

Supreme Court, New York County, New York. 2007

15 Misc.3d 1110(A) (Unreported opinion).

Background to Spitzer v. Liberty Mutual case

The defendants are an insurance holding company and its insurance company subsidiaries who are alleged to have participated with insurance brokers (referred to as “Producers” in the opinion) in an illegal kickback scheme for the purposed of obtaining lucrative insurance business.

The brokers referred to in the opinion are among the largest and best known in the world—Marsh MacLennon, AON, etc. Their client base includes the largest U.S. and foreign corporations. These brokers are the complete antithesis of the small independent insurance agents who sell auto and homeowners insurance that were described in Section A at the beginning of the Chapter.

The insurance that is the subject of the illegal scheme is “excess liability coverage.” A large corporation may wish to carry tens or even hundreds of millions of dollars of insurance covering a single occurrence, i.e., an explosion at an oil refinery. No insurer wants to take all of the risk and the insured may not want to take the risk of placing all of the coverage with a single company. The traditional approach is to obtain layers of coverage. Insurer A covers the first $10 million of losses. This is known as “primary coverage.” Insurer B covers losses above $10 million through $20 million. Insurer B’s policy is known as “excess insurance”—it is in excess of the coverage provided in the primary policy written by insurer A. In some instances there will be additional layers of excess insurance involving still more insurers.

Opinion

The factual allegations are as follows:

Since the mid-1990’s, Liberty Holding, together with its insurance company subsidiaries, which are also defendants in this action (collectively, Liberty Mutual), participated in a scheme to pay undisclosed kickbacks to insurance intermediaries. The vast majority of businesses and consumers purchase insurance through insurance intermediaries known as brokers or independent agents (Producers), which hold themselves out to the insurance buying public as the best way to purchase insurance because they can offer unbiased advice about the coverage options available.

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