Washington All Industry Day: Associations Discuss Broker Disclosure

Broker disclosure, medical malpractice reform and credit scoring dominated the discussions at the Washington All Insurance Industry Day at the Capital held Feb. 10. Over 170 independent agents gathered to learn about important legislative issues and to meet with Washington legislators.

Broker disclosure
Washington Deputy Insurance Commissioner Scott Jarvis opened the event and spoke to agents about his office’s ongoing investigation into allegations of bid rigging and price fixing in the insurance industry. Jarvis explained that the office of the insurance commissioner is attempting to find out if the same allegations that have proven substantiated in New York apply to Washington.

“Our entire philosophy for this investigation is to find out what went wrong before we suggest a remedy and we currently don’t have that information,” Jarvis said. “We did send out some requests for information from the 10 largest insurance brokers in the state and the seven largest domestic insurance groups several months ago. We have a large volume of materials from people that takes up a whole room and we’re going through it step by step. Folks have done a lot of charting, a lot of graphing. There may be some secondary requests for information. But I’d like to think that what we’re hearing so far is the extent of the damage.”

Jarvis told Insurance Journal that examiners, auditors and attorneys are sifting through the sealed room full of boxes and computer disks, but he feels that Washington is mostly free from criminal activity involving bid rigging and price fixing. Nevertheless, Jarvis said that Washington Insurance Commissioner Mike Kreidler will be thorough.

“We don’t have any complaint driven material,” Jarvis told IJ. “We don’t have any indication of criminal activity here yet. We’ll have to see where the paper trail leads. We’ve found some interesting tidbits as you would expect, a pack of documents from a big corporation, I won’t mention who, but we’ve still got months of work to do on it.”

Jarvis explained that Commissioner Kreidler recently agreed to head a National Association of Insurance Commissioner task force to discuss the implications of Marsh & McLennan’s recent $850 million settlement with New York Attorney General Eliot Spitzer. “The idea is to target specific questions towards Marsh and New York. We’re hoping that by working with Marsh we can find out more and shorten our work load,” he said.

The NAIC task force includes Washington, California, Georgia, Ohio, Illinois, Virginia, Maryland and Pennsylvania.

Attorney General Rob McKenna said that his office is interested in the issue, but the office of the insurance commissioner has primary jurisdiction over it.

“How the settlement that Mr. Spitzer negotiated with these companies is going to affect us here in Washington state is of interest to us,” McKenna said. “And that’s the challenge of any major litigation, especially litigation that involves a state like New York or several states. We effectively may have our future determined for us by that other state and what they get the parties to agree to.”

Steve Young, senior vice president of Insurance Brokers and Agents of the West, said that Washington benefits from laws that distinguish between an agent and a broker, and that Washington may not have as many problems regarding broker compensation disclosure compared to other states, such as California.

“Washington has retained separate brokerage licenses and its laws regarding disclosure are fairly enlightened,” Young said in a panel discussion on broker disclosure. “Other states have more fear in terms of change.

“It’s my understanding that if you’re acting as an agent in Washington law, basically you may not charge a fee for a placement that is made with a company that has appointed you as an agent if the compensation is solely for that placement and if the services that you are performing are only those things which the insurance company requires you as an agent of that company to do.

“To the extent that you want to perform some other service, then you may enter into a contract with the consumer and you perform that service for a fee,” he continued. “In cases where you are receiving both a commission and charging a fee, the full amount of the commission has to be disclosed.”

Jarvis agreed that Washington’s distinction between agents and brokers is valuable.

“We don’t have a definition that combines agent and broker and we’ve benefited from that,” Jarvis said. “Those rules are clearly defined and we have 100 years of case law explaining what broker fees are and what agent fees are and we have rules to back them up.”

Young said that there is a specific provision in Washington’s insurance code that says that brokers represent the client and not the insurance company. “You are presumed to owe heightened legal duties to the client,” he said.

Young said that even greater disclosure may be mandated for brokers or agents in the future. He advised brokers to disclose the full dollar amount of commission when also charging a fee. He also encouraged agents to disclose their relationship with insurance companies. “I think that’s a good business practice if you’re not doing it already,” he said.

The broker disclosure issue is still in the background in Washington because there is no connection to personal lines insurance and therefore legislators are not hearing anything from their constituents, according to Young. There are no active proposals for legislation concerning broker disclosure. But Young said that could change if Commissioner Kreidler discovers something actionable during the course of his investigation.

Medical malpractice reform
Attorney General McKenna talked briefly about two medical malpractice initiatives that will likely appear on the November 2005 ballot. One, I-330, is being sponsored by physicians and would enact a $350,000 cap on noneconomic damages in medical malpractice cases. I-336, backed by the Washington State Trial Lawyers Association, would revoke a doctor’s license if the physician has three med-mal claims against him or her in a 10 year period.

“In Florida the same thing happened and both of the initiatives passed,” McKenna said. “We are heading down the track to that potential outcome in Washington state. To some extent tort reform is moving along with some inertia and the doctors and the lawyers may have to duke it out.

“It’s pretty clear that the state Legislature is not going to adopt either one of these [initiatives],” he continued. “By failing to act they will automatically go to the people in the November 2005 general election. We have a preference in this state to allow the people acting as the Legislature to develop initiatives and get them on the ballot and then to vote on them.”

Jarvis said that he prefers a legislative solution as opposed to the dueling ballot initiatives. “The commissioner’s publicly stated that both these initiatives are flawed,” Jarvis told IJ. “They both have problems and we’d be better off without them and better with a legislative solution.”

Jarvis said that he doesn’t believe that there is a med-mal crisis in Washington. He reiterated the fact that Washington’s biggest medical malpractice insurance carrier, Physicians Insurance, a doctor-owned company with about 60 percent of the market, filed a 7.7 percent rate decrease this year. “When your biggest market is having a decrease you’re feeling pretty good,” he said.

Jarvis said that there is adequate capacity in the market despite some shuffling in the past few years. For example, two years ago Washington Casualty Insurance Company, the state’s second largest market, stopped writing individual physicians and 1,300 doctors had to switch insurance companies. But he doesn’t believe that doctors are leaving en masse.

“I’m sure there are doctors leaving the state but we’ve had a lot come in,” he said. “There are anecdotal stories reported in the press. There’s stress on the system but that’s the nature of the system. Is it a crisis? I look at the dictionary definition of a crisis and I don’t think it meets it.”

Credit scoring
Industry lobbyists discussed credit scoring and SB 5275, proposed legislation that would prohibit the use of consumer credit histories for personal insurance renewal decisions.

“Legislators find a way to take a personal experience and turn it into a legislative proposal,” said Bill Stauffacher, a lobbyist with the Independent Insurance Agents and Brokers of Washington. “A lot of the reason why we’re dealing with credit this year is legislators got an adverse action notice because they didn’t get the best rating. Even though on their renewal their rates went down, they are wound up over how credit does and does not work and the next thing you know there’s a bill.”

Gary Strannigan, a lobbyist for Seattle-based Safeco, explained the importance of credit scoring to the insurance industry. “Credit has proven to be the most accurate predictor of risk that we have access to,” Strannigan said. “We have to make sure that that’s still available for companies to properly price insurance.”

Strannigan said that if the use of credit histories was banned, independent agents would be at a competitive disadvantage. “The good risks would be pre-screened by the direct writers. The best insurance customers will be aggressively sought after under the credit matrix by folks who do that screening before they do the marketing.”

Jarvis agreed that credit is an accurate predictor of risk, but believes that SB 5275 is flawed. “The commissioner generally supports this kind of effort, but it has significant implementation challenges. We’ve always said there’s a correlation. The question is the impact on different classes. You get into the argument whether it’s discrimination or whether it’s a disparity impact that’s allowed.

“The bottom line is would consumers be happier without it? Yes. Would a lot of agents be happier without it? Probably. Is it a predictor of risk? Yes. The credit scoring issue is still alive but I don’t think it has the heat and fire behind it like it had a couple of years ago,” Jarvis concluded.

Topics New York Agencies Legislation Washington Market Medical Professional Liability