New York Insurance Department Questioned Contingent Fees Since 1998

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While it did not begin appearing in news headlines until last October when charges were brought against Marsh, the controversy over brokerage contingent fees has actually been simmering for more than a half dozen years in New York insurance circles.

Back in 1998, the New York State Insurance Department ordered brokers and insurers to disclose to policyholders all compensation agreements between brokers and insurers and to keep a record of these fees. The regulatory order, known as Circular Letter No. 22, even warned that the department would inquire about these agreements in future market conduct exams.

The letter states that a broker is a legal representative of the insured, and that the undisclosed receipt of additional compensation from an insurer is sufficient to create the perception that brokers are conflicted in their loyalties. It says that such conduct may constitute a violation of state insurance law and raise issues of trustworthiness.

"At the time, we did not see the improper behavior behind contingent fees but the potential was there so the department absolved the conflict by requiring disclosure," said Gregory Serio, past Superintendent of Insurance.

"Circular Letter No. 22 shows disclosure doesn't work," said Alexander Grannis, Assemblyman on the New York Assembly Committee. Grannis goes on to say that adding a legislative ban on contingent fees may be needed.

Even Attorney General Eliot Spitzer acknowledged the importance of Circular Letter No. 22 before the committee.

"The insurance department properly identified trustworthiness as a primary concern arising from insurance brokers' receipt of undisclosed compensation," Spitzer said. "However, at the time, the direct connection between a broker's receipt of undisclosed compensation and the widespread market manipulation, fraud and steering practices that result from such compensation, was not fully understood."

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