Calif. seeks insurer reforms

Proposed rules to require brokers to list bonuses

Lawsuits also are weighed

50 state insurance chiefs confer by telephone

October 21, 2004|By Kenneth R. Gosselin | Kenneth R. Gosselin,THE HARTFORD COURANT

California proposed regulations yesterday to force insurance brokers and agents to fully disclose their compensation or face stiff fines and the loss of their licenses.

The regulations, if approved, would levy fines of up to $10,000 each time a bonus or "contingent" commission wasn't disclosed. Violations also could lead to the revoking of licenses to sell insurance.

California insurance regulators also said they planned to file civil lawsuits next week but declined to name the targets or types of insurance involved.

The developments came less than a week after New York Attorney General Eliot Spitzer announced a civil lawsuit and an investigation targeting bid rigging and questionable compensation arrangements between commercial property-casualty insurers and insurance brokers.

Spitzer's lawsuit exposed serious conflicts of interest in the industry, raising troubling questions about brokers putting insurer's interests before the interests of their corporate clients.

Spitzer sued Marsh & McLennan Cos. Inc., the No. 1 insurance brokerage, for allegedly colluding with insurers to reap fees. The company said yesterday that it suspended five employees after Spitzer's investigation.

With no federal regulation of the industry, oversight is left to individual states.

As multiple investigations into the insurance industry gain momentum, insurance regulators from the 50 states organized a conference call yesterday to plan how they would share information in potential probes of their own.

California had been conducting its own investigation of how brokers and agents are compensated since spring.

The regulations proposed yesterday cover all forms of insurance, including auto, homeowners and life policies that are sold to consumers.

"It's a very sad day for the insurance industry," said John Garamendi, the California insurance commissioner. "We have opened the first couple of pages in a very long and sordid book."

Garamendi has said he also was considering proposing legislation that would outlaw contingent commissions all together.

While those regulations pertain only to California, they could become models for other states, as the probes into alleged misconduct in the industry gather momentum.

In Connecticut, the state insurance commissioner said she also is considering measures that would require full disclosure of commissions, the central issue in a widening probe of the insurance industry.

Commissioner Susan F. Cogswell said she is studying whether disclosure rules would be best written into insurance regulations or into state law. Cogswell couldn't pinpoint yesterday when she would make a proposal.

"We're going to do it as soon as possible," Cogswell said. "We're meeting with lawyers and we're going from there."

Connecticut Attorney General Richard Blumenthal said he would seek new laws to make anti-competitive behavior a crime and to curb questionable commissions.

State law now allows only civil action.

Blumenthal said his office would propose a package of reforms in the next legislative session requiring more disclosure to consumers about agent and broker commissions. He said he also foresees a measure that could even constrain or eliminate some commissions.

Connecticut's own investigation kicked into high gear this summer. That's when Blumenthal, helped by the insurance department, sent out 135 letters to insurance brokers and agents asking about compensation arrangements and looking for potential conflicts of interest.

This week, Blumenthal began issuing subpoenas to insurance companies and brokers.

Cogswell, the insurance commissioner, said she began researching full-disclosure options after Spitzer announced his investigation.

"That's when everything started to bubble," Cogswell said.

Spitzer's probe also prompted state insurance commissioners to hastily organize yesterday's conference call, so top insurance officials could coordinate how they might share information.

The president of the National Association of Insurance Commissioners, which organized the conference call, issued a warning to the industry.

"Brokers and insurance companies that have been abusing the system for personal gain will be identified and appropriate actions will be taken," said Diane Koken, the association's president and Pennsylvania's insurance commissioner.

And while commercial property-casualty insurance has been in the investigative spotlight so far, other kinds of insurance should not be overlooked.

"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," Koken said.

Courant staff writer Diane Levick contributed to this article. The Hartford Courant is a Tribune Publishing newspaper.

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