California Insurance Commis-sioner John Garamendi has announced that he will halt efforts to adopt new regulations imposing fiduciary duties and mandatory disclosure regulations on insurance agents and brokers.
“We have been working with IBA West (Insurance Brokers and Agents of the West) and others in the insurance industry to encourage changes in the practices of agents and brokers that will prevent steering and bid rigging,” the commissioner said. “We also have stressed the obligation that all insurance professionals have to fully disclose any manner in which their compensation might influence the recommendations they provide to their customers.”
In making his announcement to suspend issuing agent-broker compensation disclosure regulations, Garamendi said he was giving “the various initiatives coming from the industry an opportunity to take root.”
Particularly, he noted that a voluntary “Guide to Compensation Disclosure” developed by IBA West as well as other initiatives being taken by the industry to respond to the agent-broker compensation scandal helped stave off the need for mandatory requirements.
“If the in-dustry is able to correct this problem on its own, we do not need regulations,” the commissioner said. “The Department of Insurance will watch carefully to see whether the various efforts to deal with this problem, including the suggestions contained in IBA West’s Guide, are widely adopted by agents and brokers, and what benefits they provide to consumers We will monitor the industry closely to determine whether further regulatory action is needed to fully protect consumers,” he said.
While the Alliance of Insurance Agents and Brokers is generally pleased with the commissioner’s decision to drop new disclosure regulations, the group is concerned that “the DOI will take what was introduced as a disclosure guide offered to them and use it for any enforcement tactic on their part,” said Ken Nigohosian, the Alliance’s executive director.
“Based on the DOI’s press release, the Alliance is concerned that the DOI expects the industry to impose self-created disclosures patterned after the withdrawn regulations that lacked authority under case or statutory law. From the press release, the DOI focuses on the new IBA West Guide’s disclosure recommendation as a basis for its recognition that the industry is now regulations itself.
“With all due respect to the IBA West, we are disappointed that they would issue these guidelines,” Nigohosian added. “If the DOI press release is accurate, we are astonished that [IBA West] would want to share its disclosure guide with the DOI, providing the commissioner with another reason to breathe life into this unnecessary issue. This places IBA West in an untenable position of carrying forward the DOI’s policy for disclosure, while also taking the position that the relationship between insurance producers and customers is not fiduciary.”
Robert Hogeboom, the Alliance’s outside counsel, emphasized in a press release that his organization’s concern was that the Guide IBA West claims to be voluntary is being advocated by the DOI as something that should be “widely adopted” by agents and brokers. “Disclosures other than those set forth in the broker fee regulations are unnecessary in most transactions,” he said.
IBA West said it has blocked every attempt by the commissioner to create fiduciary relationships and impose mandatory disclosure requirements. Nevertheless, believes the voluntary guide is beneficial because the organization’s members have requested the information.
“Several of the largest brokers announced in the past 18 months that they were moving toward full transparency, and several insurance companies including State Fund are also taking the initiative and disclosing commission amounts. So the industry itself is already beginning to move in this direction,” said Steve Young, IBA West’s general counsel. “That’s why our members asked us for assistance in trying to figure out what, if anything, they ought to be telling their customers and how they ought to be telling them.”
Young said IBA West’s guide was the culmination of work a task force had prepared during summer 2005 based on member requests. Furthermore, Young said the guide addresses important issues that are broader than compensation disclosure. “At issue here is the set of expectations that consumers have when they engage a broker or agent and the way that brokers and agents then can make sure the consumer has the correct and appropriate set of expectations. Compensation is only one small part of that larger set of issues.
“For example,” he ex-plained, “one of the sets of allegations was the whole notion of steering that brokers made a business decision to give a certain amount of business or direct a certain amount of applications to a relatively small number of particular insurance companies. There is nothing illegal about steering; quite the contrary from our perspective. Brokers and agents decide every single day which companies to submit applications to. One thing the guide does is explain to customers that type of business decision so there’s no confusion in customers’ mind than an exhaustive search of the entire industry has been conducted and whether the broker made appropriate decisions.”
Despite the disagreements over the need for the voluntary guide, the industry is pleased with the ultimate outcome-the commissioners’ decision to drop mandatory disclosure regulations.
Already, agents and brokers nationwide are using the decision of the California insurance commissioner to fight proposals for mandatory disclosure regulations in their own states, according to Young. “The argument being is that if the most activist, anti-industry, pro-consumer regulator in the country has determined that disclosure requirements are not necessary in California, why are they necessary anywhere?” Young said. “We’re also seeing evidence coming out of the legislature that no new legislation on this subject is being considered because if the regulator determined the industry should regulate itself, there’s no reason to even talk about any bills on this subject.”
In November 2004, the California Department of Insurance proposed broker fiduciary duties regulations that, if adopted, would have required brokers and agents to secure the “best available” insurance coverage from the “best available” insurance company. Then earlier this year, CDI proposed revised regulations that would have imposed mandatory disclosure obligations on almost all brokers and agents.
Industry associations-the Alliance, IBA West and others-have consistently opposed the proposed regulations.
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