PCI Has “Significant Doubts” Concerning NAIC’s Agent Disclosure Proposals

January 20, 2005

The Property Casualty Insurers Association of America has issued a bulletin indicating that it has some “significant doubts” concerning the NAIC’s proposed inclusion of disclosure duties on agents.

The PCI noted that a proposed amendment to the producer licensing model act would conflict with common law, impose new and unnecessary costs on the insurance system, interfere with certainty of contract, and open the door for needless litigation.

“Many regulators have expressed their concern that Section B, earlier excluded from an amendment to the Producer Licensing Model Act, should not be added to the model. PCI joins them in that view,” stated PCI VP and Counsel Mike Koziol.

“In certain circumstances, such as broker relationships, reasonable disclosure of compensation can be an important component of open, fair, competitive, and reasonably regulated markets,” Koziol wrote. “But in the case of agents, when representation is clear and consumers understand that the insurer compensates the agent, there is no conflict, real or perceived, and there is no need for any disclosure to the consumer. And that representation is crystal clear in situations where the transaction is with a direct writer, either via Internet or telephone.”

The PCI also took a firm stance against imposing fiduciary duties on producers – indicating that: “Any law imposing a fiduciary duty on agents and brokers would transform insurers and producers from a competitive industry into personal financial guardians of the insured, a result that goes well beyond anything required by law or common sense.”

In its statement to the NAIC on a proposed amendment to the producer licensing model act, PCI also objected to the concept of applying fiduciary responsibility to producers, especially for agents, who are clearly employees of insurance companies.

The organization said that while it supports reasonable disclosure of broker compensation, establishing a fiduciary duty on brokers would create unreasonable and unenforceable standards. “The fiduciary duty as proposed by the NAIC and other proposals requires brokers to select the ‘best available insurer’ based on ‘coverage, service, financial security and price.’ Unfortunately, these extremely subjective terms will be impossible to interpret, and will give rise to future litigation. Such amorphous and unlimited liability will be at the expense of the entire insurance marketplace, and as with any product, the litigation costs surrounding that product will ultimately be borne by the consumer.” It finds the December amendment, as adopted, to be far from crystal clear in its application to agents. “A model imposing a fiduciary duty on brokers easily can be stretched to impose it on agents, which is wholly inappropriate,” Koziol stressed.

PCI also opposed a requirement that a broker disclose all quotes. “The NAIC should let the natural market relationship of the parties operate,” it observed. “Customers are not bound to retain any specific broker and can demand to see all quotes from their broker simply by asking. Brokers that do not operate the way customers expect them to will soon find themselves out of business.”

Finally, the PCI opposes any attempt to require disclosure of producer owned reinsurance arrangements. “Such arrangements are best left to the parties,” Koziol concluded.

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