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N.Y. broker pay rules draw fire

Brokers group slams mandatory disclosure, threatens legal action

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NEW YORK—The New York State Insurance Department last week took the final step toward promulgating new regulations that would require agents and brokers operating in the state to disclose all forms of compensation they receive from insurers upon client request.

The long-anticipated disclosure rule, which regulators have been working on since they held joint hearings in 2008 with the New York attorney general's office (BI, July 28, 2008), was published in the New York State Register last week and remains essentially unchanged from the revised version proposed in September (BI, Sept. 14).

The public has until Jan. 16 to comment on the regulation, at which point the NYSID will have the authority to adopt it.

“We plan to move quickly once we have the authority,” noted Matthew J. Gaul, special counsel with the NYSID.

Such a move, however, is not coming without a fight.

The Independent Insurance Agents & Brokers of New York Inc. said last week that it is prepared to sue the NYSID if it does not withdraw the published regulation. Not only is the regulation “unwarranted” but the New York insurance superintendent “does not have legal authority to compel compensation disclosure,” the association said in a statement.

Under the published rule, insurance producers operating in New York state would be required to notify insurance buyers of their right to request information on the compensation they receive from insurers in connection with their insurance placements (see box).

In addition, they must automatically disclose to clients either orally or in prominent writing before the insurance or renewal application is sent to the insurer whether they represent the insurance purchaser or the insurer for purposes of the sale and, if applicable, that they will receive compensation from the selling insurer.

Now in its fourth iteration, the latest version of the rule remains in contrast to the NYSID's first proposal in January that called for mandatory compensation disclosure by agents and brokers.

Although the Risk & Insurance Management Society Inc. still prefers the NYSID's original proposal, Vp Terry Fleming said RIMS nonetheless “applauds the leadership” of the NYSID and understands “that it is difficult to get consensus from all parties.”

However, RIMS will “be expressing its concerns to the NYSID during the 45-day comment period,” said Mr. Fleming, who is director of risk management for Montgomery County, Md.

The IIABNY is taking its concerns a bit further.

In a letter last week to New York Insurance Superintendent James J. Wrynn, IIABNY Legal Counsel James C. Keidel said there are “serious problems” with the proposal. “Unless the proposed regulation is withdrawn, we will have no alternative but to seek redress in the court system to challenge the proposed regulation and any efforts to adopt a similar regulation,” he said in the letter.

Among its concerns, the IIABNY said it “denounces” the mandate requiring producers to disclose to clients whether they represent the insurer or buyer in a transaction. That provision “requires that producers evaluate complex legal concepts and then make legal conclusions that even the judiciary has struggled with,” Mr. Keidel wrote.

The letter also warned Mr. Wrynn that the rule would result in higher costs, may promote illegal rebating of premiums to clients, and could improperly focus buyers' attention on payments to producers rather than the quality and price of their coverage.

Reacting to the objections, the NYSID's Mr. Gaul said, “We are surprised that what we viewed as the least controversial aspect of disclosure has prompted the threat of a lawsuit—the requirement that brokers and agents clearly explain who they represent in the transaction. For years, the Big I's members have said they are the "trusted choice' for consumers. What they apparently don't want to tell their customers is that in most transactions they represent the insurance companies.”

The regulation can be found on the NYSID's Web site at http://www.ins.state.ny.us.