Calling secret broker commissions a “serious problem that betrays the public’s trust,” California Insurance Commissioner John Garamendi announced new regulations on Oct. 20 to require agents and brokers to disclose any financial incentive they would receive for selling certain insurance products and steering business to specific companies.
Targeting a practice that has sparked a national controversy and criminal charges against industry executives, Commissioner Garamendi said his proposal would help clarify and strengthen the laws prohibiting these practices.
“When consumers place their trust in the hands of agents and brokers to find them the best policy at the best price, they should know if a backroom deal has already been struck,” Commissioner Garamendi said. “My ongoing investigation will expose these under-the-table kickbacks that are not in the best interest of consumers.”
The regulations were released Oct. 20 for public review, after which they must gain the approval of the state’s Office of Administrative Law. The proposal covers various requirements for agents and brokers, including:
A broker who fails to disclose to a client all material facts surrounding the broker’s receipt or potential receipt of income from a third party, which income derives in whole or in part from a transaction on behalf of the client, violates Insurance Code section 790.03(b).
A broker who places his or her own financial or other interest above that of his or her client violates Insurance Code section 790.02.
A broker violates Insurance Code section 790.02 if, with either new or renewal business, he or she:
(1) Fails to provide the client with the proposal of a best available insurer;
(2) Advises a client to select an insurer other than a best available insurer;
(3) Advises a client not to select a best available insurer from among multiple insurers suggested to the client.
(4) Fails to take reasonable measures to obtain a quote from an insurer that might be a best available insurer.
Commissioner Garamendi ordered the drafting of the regulations in March after the practice drew scrutiny from a foundation critical of the incentive commission practice. At that time he also initiated an investigation of the industry in California to assess the extent of this practice, and to determine the need for any ensuing regulatory or legal action.
Recently, New York Attorney General Eliot Spitzer accused the world’s largest insurance broker of steering clients to major insurance companies that had paid it large “contingent commissions.” He is pursuing civil and criminal actions in his investigation of the insurance industry, and three executives have already pleaded guilty to charges in the case.
Under Commissioner Garamendi’s proposed regulations, failure to comply could result in fines of up to $10,000 per incident, issuance of a cease and desist order by the Commissioner, and/or the revocation or suspension of a company or broker’s license.
Topics Carriers Agencies Legislation
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