Spitzer Notifies Insurers Contingent Commissions No Longer an Option

New York Attorney General Eliot Spitzer has notified four leading insurance companies that, under agreements reached with his office earlier this year, they may no longer pay “contingent commissions” to agents and brokers who sell automobile, homeowners and certain other insurance products.

This notice comes as part of settlements that each of the insurers – ACE, AIG, St. Paul Travelers and Zurich – entered into earlier this year, resolving charges of bid rigging and other improprieties related to contingent commissions.

Under the settlement agreements, the insurers must change their compensation structure for brokers and agents in any type of insurance where more than 65 percent of the insurance is sold by companies that do not pay contingent commissions, including those that have signed agreements with the Attorney General. Spitzer sent the companies formal notice that this 65 percent “tipping point” has been reached for homeowners, personal automobile, boiler and machinery, and financial guaranty insurance. As a result, the four companies must stop paying contingent commissions for these insurance products beginning on Jan. 1, 2007. They have already given them up for excess casualty insurance.

Connecticut Attorney General Richard Blumenthal and Illinois Attorney General Lisa Madigan also joined in today’s notices sent to ACE, St. Paul Travelers and Zurich. The Connecticut and Illinois Attorneys General participated with New York in the agreements signed with those insurance companies.

Agents immediately disagreed and expressed disappointment with Spitzer’s decision, calling the order “grossly unfair.”

“It is grossly unfair to impose contrived restrictions on the ability to compensate producers in a legal and honest manner,” said National Association of Professional Insurance Agents Executive Vice President and CEO Len Brevik. “PIA believes that authorities should be prohibited from using their settlement powers to bring about a ban on all contingent compensation.”

Independent Insurance Agents & Brokers of America CEO Robert A. Rusbuldt said carriers are now unable to use what otherwise is a perfectly legal way to compensate their sales forces. He noted contingent compensation is done in virtually all industries across America.

“The independent agent and broker community is greatly distressed by this development,” Rusuldt said.

“Many industries — not just the insurance industry — rely on performance-based compensation, which is legal, honest and brings many benefits to the insurance marketplace, as it does to our entire American economy,” Brevik said. “Eliminating all contingent compensation is patently unfair to those who never committed abuses, such as Main Street insurance agents. Main Street agents are not Mega-brokers.”

Rusbuldt also noted that the illegal activities uncovered by Spitzer occurred in commercial lines, not personal lines, yet, his recent decision will largely affect personal lines. “The solution imposed on carriers and agents of banning incentive compensation is totally misplaced and directed at business that was never a problem to begin with,” Rusbuldt said.

“There is no doubt that a few bad actors in the commercial lines area abused the system, and we have always agreed that those who break the law should be punished to the fullest extent possible,” Rusbuldt said. “But it is absolutely wrong and indefensible to penalize the innocent majority for the misdeeds of a handful of people. This decision will impact thousands of agencies across the country as they face reductions in compensation that will hamper their ability to create jobs in their communities, train staff, invest in their agencies, and provide consumers access to insurance. On behalf of the hundreds of thousands of agents and brokers across America who had no part in the dishonest activity of a few, we will continue to fight to preserve the right of companies to pay legal incentive compensation.”

“This is an example of settlement powers run amok. Our job is to make sure that this judicial madness does not become a model imposed on the entire insurance industry,” Brevik said.