Advisories & Insights

In the past few months, charges have exploded against the insurance industry regarding potential collusion between producers and insurers to inflate prices and their own compensation in conflict with the interests of their customers. The allegations state that producers are steering customers toward particular insurers based on prearranged compensation agreements which offer the biggest incentives rather than determining the insurance product most suitable to the customer.

National Investigation. On October 14, 2004, New York's Attorney General Elliott Spitzer filed civil charges against regarding producers' receipt of contingent compensation. These charges have led to swift action by state regulators regarding contingent compensation arrangements throughout the West Coast. Oregon and California both released proposed rules relating to disclosure of contingent compensation. Additionally, the National Association of Insurance Commissioners NAIC issued a proposed model rule it intends to have formalized in time for the 2005 legislative sessions.

Washington. The State of Washington has not issued any formal rulemaking procedures at this time. However, the State Insurance Commission has issued "letters of inquiry" to several insurance companies as well as selected insurance producers requesting information regarding contingent compensation. We expect the State of Washington to shortly issue proposed rules relating to the disclosure of contingent compensation.

Oregon. The State of Oregon has been reviewing several proposed options regarding compensation arrangements between insurers, insurance producers and their customers. At a recent rulemaking session, the State of Oregon appeared to lean toward adopting the NAIC model rule regarding contingent compensation. The NAIC model rule applies to all parties who "act on behalf of the customer" and requires producers to disclose and obtain written client approval in advance of the client relationship, the potential of contingent compensation and a reasonable estimate of such compensation.

California. California has issued a proposed model rule which is different from the NAIC rule. The proposed rule requires disclosure of any compensation which is deemed "material" and requires producers to act in accordance with a fiduciary duty to provide their customers with the "best available" insurance product. California is also considering the NAIC model rule, which was released after California's proposed rule was drafted.

Suggested Response. It is clear that some disclosure of compensation will ultimately be required by each of the states in the West Coast region. Both insurers and producers should begin to organize a contingent compensation team to evaluate current practices and procedures. Outside counsel should be consulted to provide expertise on conducting the evaluation and to ensure that privilege remains intact in the likelihood of civil, criminal or regulatory action. In the event your organization receives requests from a State Insurance Commission, be prepared to respond in a timely and diligent manner.

A coordinated effort will assist your organization in managing and mitigating the exposure to state regulatory action as well as any civil or criminal exposure. Bullivant has assembled a team of experienced lawyers to help service our insurance clients. We are available to immediately respond to manage any undesired disclosures with regard to parallel regulatory and civil actions and evaluate your current practices and procedures for compliance to mitigate any potential action before it arises.

If you have questions please contact your Bullivant Houser Bailey attorney, or any member of our insurance regulatory team: Tony McHugh and Scott Stickney (Washington); John Bennett and Jeff Robertson (Oregon); David Lane and Jess Millikan (California).