Spitzer brought bad practices to light; a good thing, panelists say

By | March 6, 2006

That the investigation of New York Attorney General Eliot Spitzer into compensation practices of the nation’s insurance brokers and carriers brought to light the unethical behavior of some bad industry apples was a good thing, according to a panel of insurance professionals at the 2005 Dallas All Industry Day. In the long run, the renewed emphasis on ethics and transparency is a positive for the industry, they maintained.

“Clients want to know that you’re doing what’s ethical and what is right. The Spitzer investigation proved that there were some players in the industry that were not doing things right,” said Frank Swingle, principal, Swingle, Collins & Associates and vice president of the Independent Insurance Agents of Texas.

Swingle, a member of the panel brought together to discuss “The New Standard of Ethical Behavior,” at the Dallas “I” Day, jointly sponsored by the Independent Insurance Agents of Dallas, the Dallas Chapter of CPCU and the University of North Texas, was joined by Mary Lynn “Mel” Bangs, risk manager, Omni Hotels; Tom Culpepper, attorney, Thompson, Coe, Cousins & Irons LLC, U.S. Congressman Jeb Hensarling, Dr. Brenda Wells, associate professor of Insurance, University of North Texas; and Cynthia Marcotte Stamer, attorney, Glast, Phillips & Murray PC. David VanDelinder, executive director of the IIAT, moderated.

“When a customer asks us what we make we have an obligation to tell them exactly what we make,” Swingle continued. “If you can’t pinpoint because of contingencies what that dollar [amount] is, you can still tell them the parameters.” He noted that in his agency’s experience clients are often surprised as to the amount the agency makes on their accounts. “They think we make more until we tell them,” he said.

Bangs said transparency, as it applies to compensation practices, is not a new word in the risk management community, it’s just that risk managers had “to ask specifically about compensation.” She added that now she receives “a lot more paper than in the past,” which elicited laughter from the audience of mostly agents and brokers. Bangs said she sees “all the quotes and they come down on company letterhead,” adding that the increased documentation occurs across the board, “from the companies to the brokers to the risk managers.”

UNT’s Wells said she emphasizes to her students that transparency is critically important “to a successful career in our industry. … One of the key issues that I’ve tried to hammer home … is that ethics and profits are not mutually exclusive.”

If one is trying to determine whether an action is the right thing to do, “the transparency test is a pretty good one,” Wells said. “Would you be proud to say what you’re doing in front of a group of people like this? Or in front of a group of consumers? Or regulators? If there’s a question about the answer to that you should probably rethink what you’re doing.”

She said she encourages her students when looking for a job to seek out companies in which ethical decision making is a priority, that will tell them, ‘Make an ethical decision today over making a buck today because it will be more profitable in the long run to do so.'”

Wells added that the “students that are capable of becoming leaders in our industry are valuing this more so than my contemporaries [did] when I went through college.”

Don’t let juries decide if you’re in a gray area
Juries don’t like conflicts of interest, said Thompson Coe’s Culpepper. In civil cases, Culpepper said when it comes to disclosure juries view it negatively “if you hadn’t disclosed your arrangement or fee. I can tell you that juries really will be upset with you if they view a fee you’re charging either as a conflict or it hasn’t been disclosed properly.”

Juries, he said, “believe you should be representing them and not putting your interests above theirs.

“If you’re wondering if what you’re doing or planning to do is ethical, you won’t have a problem talking about it. You don’t want 12 jurors to tell you whether or not you’re in a gray area,” Culpepper said. “You should already know that. And I think in most instances you can clear up that problem rather early.”

Culpepper said agents and other insurance professionals need to keep in mind the oaths they take when they achieve professional designations, such as the Chartered Property Casualty Underwriter, in which they promise to work in the insurance client’s best interest.

In a trial situation, he said, “with CPCUs or agents with certain designations, the plaintiff’s lawyer on the other side will whip out the Code of Ethics for CPCU, and they’ll put it in front of you and they’ll say: ‘Didn’t you take an oath that you would place my client’s interest above yours?’ And you say ‘Yeah, I did.’ And they’ll say, ‘Well, when you put my client with this particular carrier because you got a higher commission and didn’t put them with this other carrier whose product may be a little bit more limited, do you think you were putting their interest above yours?’

“If you can’t answer those questions, you’ve got a real problem,” Culpepper said.

Industries behaving badly
Rep. Henserling mused that competition and the marketplace does a fairly good job of weeding out the bad players. “If you look at what happened with the Spitzer investigation–you had two 800 pound gorillas telling people what to do, and they got so big that the market couldn’t respond to their pressure.” He also alluded to market pressure in the Enron case, stating, “Arthur Anderson is no more, and the market has something to do with it.”

Wells, however, was not so sure that the market always performs its policing job well. She said she explains to her insurance classes that, “as much as you may be opposed to more regulation and bigger government, if you look at our industry or any other industry, including academics, left to its own devices we tend to behave pretty badly. … There are some people that don’t, as we say in the South, ‘they don’t have any home training.’ They don’t know the difference between right and wrong. And in their mind what’s right is whatever makes a buck. … We’ve seen bad behavior in every industry. … I agree with the congressman that the market can impose sanctions, but oftentimes the market doesn’t respond quickly enough before a lot of people get hurt. [With Enron] yes, the market got them but how many people got hurt before that happened?”

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Insurance Journal Magazine March 6, 2006
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