Why agents oppose contingent commission settlements

By | October 23, 2006

Imagine for a moment a state legislator introducing a bill that made it illegal for businesses to pay year-end bonuses to their sales forces.

Then imagine that this piece of legislation also made it mandatory that all businesses provide written notices to their customers disclosing the portion of the cost of each individual product that goes to compensating that firm’s sales force, specifying a percentage or dollar amount for each individual item or transaction, and requiring that a written notice be provided to and signed by the consumer before any sale can be completed.

And then imagine that this legislation also included a provision requiring all businesses to lobby for laws and regulations making the payment of year-end bonuses illegal.

Clearly such a bill, were it ever to be introduced in any state legislature, would be instantly dead on arrival, and with good reason. No lawmaker in his or her right mind would ever seriously propose such an attack on how the American free enterprise system operates.

Unfortunately, that’s what we are now seeing — not in the form of legislation, but rather in proposed agreements to settle pending litigation.

Zurich case flaws
On Sept. 15, 2006, the National Association of Professional Insurance Agents (PIA National) filed a friend-of-the-court brief in the U.S. District Court for New Jersey. PIA is requesting a delay in preliminary approval of a class settlement with Zurich Insurers until flaws in a mandatory disclosure statement are corrected. Our filing also raises other serious questions regarding restrictions on some contingent commissions.

PIA did not take this step lightly. Unfortunately, we had no other option.

Starting in late 2004, several state attorneys general announced that they had uncovered instances of alleged bid-rigging in dealings involving a handful of top-of-the-marketplace mega-brokers in insurance. Proposed settlements in resulting civil actions seek to ban the payment by carriers of certain contingency payments, as well as require the use of disclosure notices that PIA believes are defective, confusing to consumers and possibly illegal.

PIA tried to participate in the drafting of the mandatory disclosure statement in this case, but was unfairly locked out of those negotiations. When the settlement was being crafted in secret, the concerns of agents were not taken into account. Unfortunately, the carriers involved in this process are in no position to make modifications to these imposed results. As a result, we were compelled to file our comments together with our proposed changes to the disclosure statement directly with the court, as a friend of the court, for its consideration.

Beyond our immediate concern about the flawed disclosure document in this case, there are broader issues involved here. PIA objects to this and similar proposed settlements because they would create disparate impact on PIA members’ livelihoods by prohibiting the payment by carriers of certain contingency payments.

In the case of the proposed settlement involving Zurich, another provision requires the company to “support legislation and regulations in the United States to abolish Contingent Compensation for insurance products or lines.”

First Amendment concerns
This provision raises serious First Amendment questions. We believe that it is not within the purview of these few attorneys general to attempt to bring about changes in the law by requiring firms or individuals who enter into such agreements to advocate for specific legislation and regulations. Officials should not be using their authority to function as lobbyists in a manner that usurps the policymaking role of state legislators. No business should ever be forced by the government to advocate for a particular piece of legislation, just as no individual should ever be required by the government to support one political candidate over another. Such action is a perversion of democracy itself.

PIA is very concerned that if left unchallenged, the kinds of prohibitions on compensation contained in these agreements could be applied to other sectors of our economy, adversely affecting a wide range of small and mid-sized businesses.

Regrettably, settlement agreements crafted since this issue came to the forefront in 2004 have attempted to paint all producers and carriers with an assumption that everyone in the insurance industry who receives performance-based compensation is violating the law. This is clearly not the case.

These settlements propose to fundamentally change the way in which most American businesses operate. Commissions, contingent or not, are a mainstay of our economy. In our industry, they also support critical, professional front line underwriting by agents to assure the financial health and solvency of insurers that we all rely on. Rather than attempting to bring about the elimination of incentive compensation as a means of discouraging abuses of the system, state attorneys general should concentrate on policing such abuses.

PIA condemns illegal actions such as bid-rigging whenever and wherever they occur. Those who violate the law must be punished. But if fairness is the goal, as it should be, then those who have not violated the law should not be punished.

Main Street insurance agents did not commit the alleged abuses that led to these proposed settlements. But these settlement agreements attempt to impose ill-advised remedies for wrongdoing on Main Street agents, who did nothing wrong. That’s just not right.

Leonard Brevik is executive vice president and chief executive officer of the National Association of Professional Insurance Agents.

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