Trade Groups Sue New York over Pay Rules

By | May 26, 2010

Two trade groups for New York insurance agents are suing the state’s insurance regulator over new rules that will force them to reveal to clients how much they are paid for a particular transaction.

The Independent Insurance Agents and Brokers of New York (IIABNY) and the Council of Insurance Brokers of Greater New York (CIBGNY) had pledged earlier this year to file the lawsuit.

The regulations require agents to disclose, among other things, their commission and whether they represent the buyer or the insurer in a particular transaction. The rules are set to go into effect on Jan. 1.

Insurance agents argue that the rules are burdensome and will confuse clients unnecessarily. The state and other advocates counter that the rules will increase transparency in the insurance-buying process, which they contend will be better for consumers.

The group’s lawsuit, known as an article 78 proceeding, is a legal challenge asking a state judge to set aside some or all of a rule created by a state agency.

Specifically, the groups argue that the New York State Insurance Department lacks the legal authority to create the rules and that the regulations “impose massive and unwarranted costs of compliance on brokers” and are “an arbitrary exercise of regulatory power.”

Earlier this month, in a speech to members of his group, IIABNY Chairman David Gelia pledged that “if we fail at the judicial level, we will then do all we can at the legislative level to right this wrong, which has been perpetrated on the independent agent system.”

Matthew Gaul, deputy superintendent for the New York State Insurance Department said that the department has worked with IIABNY and CIBGNY for the last two years in putting together the rules, and said that it’s baffling why the two trade groups would fight the regulations.

“It’s a simple regulation,” he said. “The notion that the industry groups would fight this in court is mystifying and disappointing… What is it that they have to hide? Why they are so adamant about hiding information about commissions?”

Gaul said the lawsuit would complicate the department’s relationship with IIABNY and CIBGNY as they groups try to work with regulators on compliance issues. “We won’t be able to have the open dialogue that we would have on implementation with groups that are litigating the issue with us.”

The decision to file the lawsuit has created a schism among agency groups in the state. IIABNY and CIBGNY are jointly filing the suit, while the state’s other agents’ trade group, the Professional Insurance Agents of New York (PIANY), said it would not join the suit. Among its reasons, was the belief that it would make it impossible to work with the department on compliance with the law.

“Our commitment against mandatory disclosure is unwavering,” said Kevin Ryan, president of PIANY, which is lobbying the department on ways to make the regulations more palatable to agents. “In the event the regulation does take effect at some point, Main Street agents and brokers will have had the benefit of a strong, persuasive voice shaping how producers can fulfill the requirements with as little disruption to their business as possible.”

Agents across the state, particularly IIABNY members, appear to have a variety of concerns over how the new rule could affect their businesses.

The need for the new rules is “really kind of a mystery to me,” said Megan McGarry, an agent with Marshall & Sterling, which has 20 offices across the Empire State. “It’s really going to add a lot of confusion for the insureds, where insurance is not always a readily understandable topic. That if you start throwing in information that is not really affecting their coverage or anything involving our relationship, it adds additional confusion and it really takes the focus off of what is important, which is their coverage and making sure that it is appropriate.”

Many agents in particular are concerned that the compliance with the new rules will eat away at profits – a huge concern given the “soft” state of the insurance market right now.

“Working efficiently and effectively is very important to drive profits to the bottom line, and certainly we like to do all the right things by our clients, but it seems if regulation adds unnecessary paperwork or work on our part that really doesn’t have any effect on what the client is looking to obtain from us, it would slow everything down and be a lot less effective,” said John Costello, a commercial lines producer at the 350-employee First Niagra Risk Management.

The regulations, which were first floated two years ago, stem from a number of lawsuits and settlements in 2004 and 2005 with some of the industry’s largest brokers and insurers over the steering of insurance accounts and the payment of contingent commissions.

“We’re paying for the sins of the larger brokers on what they have done and how they manipulated the insurance companies,” said John Stype, principal with the Neefus Stype, a 37-employee agency on Long Island. “Smaller independent agents, don’t have that power that the other, larger brokers have been able to exert in the past. They’re lumping us together with those larger brokers.”

Steve Spiro, national director for IIABNY and a principal in Valley Stream-based The Excelsior Group, echoed those comments. “I don’t think it’s fair to ask agents to do it. I think those that were violating the law, violating their clients’ trust, should have been penalized. They should have been the ones affected by this. I don’t think the universe of agents should be brushed with the same broad stroke as the few that caused the problem in the first place.”

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