INSURANCE BROKERS AND AGENTS OF THE WEST

Transcription

1 INSURANCE BROKERS AND AGENTS OF THE WEST Mailing Address: 505 Montgomery Street, 11 th Floor San Francisco, CA Direct Phone: (415) Fax: (415) Stephen L. Young Senior Vice President & General Counsel Mr. Jon Tomashoff Senior Staff Counsel California Department of Insurance 45 Fremont Street, 21 st Floor San Francisco, CA Re: : Proposed Broker Fiduciary Duties Regulations Dear Mr. Tomashoff: On behalf of the Insurance Brokers and Agents of the West, I am writing to respectfully express our strong opposition to the Broker Fiduciary Duties regulations proposed by Insurance Commissioner John Garamendi. IBA West is a voluntary trade association representing independent insurance agents and insurance brokers. Our membership comprised of more than 900 agencies and brokerages, and tens of thousands of individual broker-agents would be severely harmed by these regulations, and so would California insurance consumers. We regard the proposed regulations as an ill-advised solution in search of a problem that Mr. Garamendi has neither documented nor even well-defined. It is the job of the Commissioner to interpret and enforce existing law not to create wholly new, completely unprecedented, and draconian duties upon licensees subject to his jurisdiction. And even if he did have that authority to effectively circumvent the Legislature and create new laws by personal fiat this set of regulations, as drafted, is so utterly ambiguous, so totally in conflict with provisions in the California Insurance Code and even other Department of Insurance regulations, and so unworkable in practical effect, that it would be impossible for agents and brokers to know what they had to do in order to escape liability under the radical new standards being proposed. Page 2 Before Mr. Garamendi may adopt new regulations, California law requires him to establish (among other things) the necessity for new regulations, the statutory or other legal authority in need of regulatory clarification, the consistency of his proposals with existing laws, and clarity (or lack of ambiguity) in the new rules being proposed.

2 If any one of these requirements is not met, California s Office of Administrative Law is required, pursuant to law, to reject the proposed regulations. We believe the Commissioner has failed to meet each and every one of these standards. Overview of Regulations Mr. Garamendi has proposed a regulation that would require virtually all insurance producers in California, in every type of insurance transaction regulated by the Commissioner, to disclose all compensation or potential compensation received from insurers. While IBA West would take legal exception to many of the definitions employed by the Commissioner in articulating this requirement primarily because of their inconsistency with established law we do not conceptually oppose new disclosure requirements, provided they are reasonable in scope and limited to brokers. However, this proposed regulation goes much further. It also purports to impose unprecedented new legal duties upon insurance salespeople to recommend the best available insurance companies although this term is so ill-defined that the best option for the consumer, like beauty, would be impossible to objectively ascertain and to subject salespersons to something approaching strict liability for failing to meet this impossible standard. We are not aware of any provision in the law of California, or of any other state, that holds insurance agents or brokers to such an impossibly high standard not only exceeding the duty of reasonable care, imposed as a general rule on all professionals, to make appropriate professional recommendations, but also creating a radical new duty to affirmatively recommend a theoretical best consumer option. The Proposed Regulations are Not Necessary These regulations are inspired not by any inadequacy in the current law of California, or by any finding supported by objective evidence of widespread unfair or deceptive practices in the marketplace. Rather, the Commissioner appears to have proposed these regulations, at least in part, in response to a lawsuit filed by New York Attorney General Eliott Spitzer against Marsh & McLennan, the nation s largest insurance broker, alleging undisclosed kickbacks for improperly steering business to certain insurers and arranging phony bids in order to dupe customers into selecting the chosen insurers. Although certain individuals have plead guilty Page 3 to criminal acts, the balance of the allegations against Marsh itself are nothing more than that: allegations. If true, the behavior is reprehensible, and IBA West would both condemn its practice and commend its prosecution. However, the existing law of California would already plainly prohibit any such practice in this state. The Department has made no finding and offered no evidence that current law does not prohibit all of the criminal behavior alleged to have occurred in New York. Before he may adopt new regulations, the Commissioner is required to show that his proposals are necessary. That term is defined, by Government Code Section 11349(a), to mean that the agency has substantial evidence, such as facts, studies, and expert opinion to show that its proposed regulations are needed. No such evidence has been cited by the Department in its regulatory proposal. In addition, the regulations apply (in proposed Section ) to all insurance transactions. Even assuming for the sake of argument that all of the allegations against Marsh are true, the Commissioner has made no showing or even argument as to why such regulations should apply

3 to all categories of licensees and all types of transactions he supervises, such as insurance adjusters, bail agents, electronic equipment agents, car rental agents, etc, This is particularly problematic because, as explained more fully below, the definition of broker in the regulations (proposed Section (a)) is so overly broad that it potentially captures all agents as well as brokers. The Regulations Lack Legal Authority If Mr. Garamendi were simply requiring brokers to disclose what he characterized, in a News Release announcing these regulations, as secret broker commissions and under-the-table kickbacks, he arguably might have the necessary legal authority. However, this regulation goes far beyond mere disclosure of compensation, and indeed far beyond the prohibition of existing unfair or deceptive practices. The regulation purports, in proposed Section (b), to articulate new, completely unprecedented duties to affirmatively recommend and obtain best available insurers. Indeed, the very title of the regulations, Broker Fiduciary Duties, erroneously implies that a fiduciary relationship exists between insurance salespeople and consumers. There is no such relationship, as a general rule of law. Page 4 There are specific fiduciary duties, expressly set forth in the Insurance Code and limited to the handling of fiduciary funds, but there is no fiduciary relationship. The only authority cited by the Commissioner for the adoption of this unprecedented and unworkable duty to recommend and obtain best available policies is a set of statutory provisions, Insurance Code Sections 790, et seq., prohibiting insurance licensees from making statements or engaging in practices that are untrue, deceptive, or misleading. However, as explained more fully in the accompanying legal analysis, prepared for IBA West by the San Francisco law firm of Keker & Van Nest, the proposed regulations fail to meet the express statutory conditions imposed by Section for the promulgation of new regulations. The statutes cited as authority by the Commissioner plainly do not authorize him to create wholly new and unprecedented affirmative legal duties on licensees. The Commissioner also attempts, illegally, to shift a key burden of proof from the Department of Insurance to insurance producers. In proposed Section (d), buried within the definition of the phrase material fact, the Commissioner purports to impose upon brokers the burden of proving that a fact is not material for purposes of the disclosure obligations. No authority is cited for this shift which is roughly analogous to the creation of a presumption that a broker is deemed guilty unless he can prove himself innocent. The Commissioner further attempts, on a defacto basis, to impose even the disclosure requirements on persons acting as insurance agents. As explained more fully below, the definition of broker, in proposed Section (a), is so broad that it captures many licensees acting as agents in addition to those acting as brokers. If the Commissioner believes these requirements are necessary, then he is free to go to the California Legislature and seek the appropriate legal authority to adopt such provisions; however, the statutory authority cited by Mr. Garamendi does not even begin to provide a sufficient legal foundation. The Regulations are Inconsistent with Current Law

4 In multiple respects, the proposed regulations are not only inconsistent with other provisions of California law, but also contradict express provisions of the California Insurance Code and even other regulations that the Commissioner has adopted. Perhaps the greatest irony is that the regulations as drafted would violate the very statute that the Commissioner cites (erroneously) as his primary authority for their promulgation. Page 5 Insurance Code Section (b) prohibits insurance brokers from, among other things, making any assertion, representation or statement with respect to the business of insurance that is untrue, deceptive, or misleading. Yet the regulation would require brokers to make affirmative recommendations that would, inherently, qualify as untrue, deceptive or misleading. By requiring brokers to recommend the best available insurers, and by defining that phrase as we explain in more detail, below so vaguely and internally inconsistently, it would be factually and legally impossible for a broker ever to comply with this requirement. Any attempt by a broker to recommend a best insurer would, of necessity, require the broker to make untrue, deceptive or misleading representations, and therefore violate Section (b). The proposed regulation is also plainly inconsistent with other regulations the Commissioner has already adopted. For example, the Department previously promulgated broker fee regulations that apply in personal lines of insurance (See California Code of Regulations, Title X, Chapter 5, Article 6.8, Sections , et seq.). Under those regulations, brokers are required to disclose all fees they charge consumers, and also the fact but not the amount of compensation they receive from insurers. Rather than seeking to amend those regulations, the new proposal requires disclosure of all amounts of compensation. Consequently, a broker could make disclosures expressly authorized under the prior set of regulations, but violate the new set of regulations. Another problem in the proposed regulations is the expansive definition of broker. The California Insurance Code defines agent and broker very specifically in specific sections. (See, for example, Sections 31-33, , 1704, 1731, 1732). This regulation ignores that distinction and all of those definitions, and expressly includes within its definition of broker (in proposed Section (a)) producers defined in the Insurance Code, and acting, as agents of insurance companies. This, the Commissioner cannot do because his regulatory definition of broker is contradicted by express provisions of the Insurance Code. A further problem is the irreconcilable conflict between the above-referenced duty to recommend the best available insurer based in part, under proposed Section (e), on price and the provision in Insurance Code Section 1763(c) that flatly prohibits surplus line brokers from exporting policies to the non-admitted market on the basis of better price. As Page 6 drafted, these regulations would force surplus line brokers and retailers to choose between violating the Code or violating these regulations; they could not comply with both.

5 The Regulations are Riddled with Ambiguity The Commissioner is required by the Government Code to write regulations clearly, so that they can be easily understood by those persons directly affected by them. These regulations are anything but clear. The first problem is the Commissioner s attempt to apply the regulations to agents as well as brokers. The Commissioner could have respected the statutory definitions and distinctions drawn by the Insurance Code. Instead, he has intentionally chosen to define broker, in proposed Section (a), so broadly that many agents could find themselves subject to these requirements. Leaving aside the utter lack of authority or need to require insurance companies or their sales agents to disclose policy acquisition costs to consumers, it is impossible for agents to know whether they would be covered by this regulation because the phrase, represents, purports to represent, or allows a client reasonably to assume he or she represents, a client is too vague. Are innocent statements in a phonebook ad, such as, We shop the market for you, or We ve got you covered, enough to subject broker-agents acting as agents to these requirements? Undoubtedly, plaintiffs lawyers would make that very argument and more in attempting to use the ambiguous language in the regulations to expand its scope. The next problem is the imprecise definition of what needs to be disclosed. Material fact, in proposed Section (d), means: a fact that will more likely than not influence either the particular client or a reasonable client in forming his or her estimate of the advantages and disadvantages of a proposed agreement, policy or relationship, or in making his or her inquiries. It is impossible to ascertain from this definition what would need to be disclosed especially since the Commissioner has chosen a subjective, as well as objective, standard through its reference to particular clients of any broker. The worst, most ambiguous definition of all, centers on the proposed duty to recommend the best available insurers. According to proposed Section (e), "Best available insurers" means the most suitable insurers for the client based on coverage, service, financial security and price, that are willing to provide the requested coverage through the broker. Page 7 There is absolutely no legal authority, within the Insurance Code or from any case in California or any jurisdiction of which we are aware, for this ill-defined obligation. Moreover, it is impossible to ascertain from the proposed regulation how one is supposed to apply these vague criteria many of which are mutually exclusive, or internally inconsistent with one another to determine what is best. Take "coverage" and "price." Generally, the better the coverage, the higher the price; the lesser the coverage, the lower the price. If a broker recommends the insurer with the best coverage, he will in most cases have failed to recommend the insurer with the best price, and vice versa. The regulation provides no guidance on how this inherent conflict should be resolved; as such, this requirement, as drafted by the Commissioner, is one that only a plaintiffs attorney could love: No matter what recommendation the broker makes, he could be accused of violating the regulation. Even if one looked solely at the best coverage criterion, reasonable opinions can, and do, vary. For example, is pollution liability" coverage needed? Events giving rise to such liability can occur years or even decades before consequences begin to manifest. It can be phenomenally expensive, and the liabilities are potentially so great that, in the post-9/11 environment, some insurers refuse to

6 even underwrite it. A broker could violate the regulation for recommending that coverage or for failing to recommend it, depending on whether the coverage is later found to have been needed. There is something even more insidious about this presumed duty to recommend best coverage: it represents a radical and unjustified departure from current law. California cases have long held that consumers are presumed to have the duty to determine what coverage and limits they need; this regulation effectively shifts that legal duty to brokers. It bears repeating that the Commissioner has cited utterly no relevant legal authority for this draconian imposition of liability. Take "service." It is absolutely unclear what this term means. And it is, or certainly could be, a totally subjective factor determinable only after-the-fact. If a client's expectations for claims payments are not fully met, does a broker face liability for having failed to recommend the insurer with the best "service?" Some insurers have a reputation for being very generous in claims payments, especially on highvalue policies that tend to be the most expensive. So again, if a broker recommends the insurer with the best claims service, she may very well have failed to recommend the insurer Page 8 with the best price. Or if claims payments are too generous, the insurer may not have the best financial security. So no matter what recommendation a broker makes, she faces liability for violating these utterly vague regulations. Moreover, the great irony of the Commissioner s suggestion that brokers have an affirmative duty to recommend insurers with the best service ignoring for the moment his lack of legal authority to contradict existing law on that point is that California insurance consumers voluntarily choose to use brokers to obtain their insurance because of the services that brokers themselves provide. These services routinely include such things as: designing customized coverage to protect complex and sophisticated business operations, and identifying available insurers willing to provide that coverage; negotiating cost and coverage terms on behalf of their clients; providing loss-prevention and other risk-management services to reduce the risk of loss and the cost of future insurance premiums; pressuring insurers to pay claims fully and timely; providing accurate payroll or other data to insurers on policies in which premium is subject to adjustment; and monitoring claims reserves to ensure policyholders are not penalized in future premium assessments as a result of open or prior claims. Take "financial security." Again, that term is not defined. The Insurance Commissioner is presumed to be responsible for ensuring the financial solvency of admitted insurance companies. As the recent spate of insolvencies among California workers compensation insurers demonstrates, this is not an easy job. But this regulation, again in a very insidious, defacto manner, in effect shifts this responsibility to insurance brokers by requiring them to affirmatively recommend the insurer with the best financial security. And again, the Commissioner cites no relevant legal authority for this radical transferal of liability. If, years after a policy was sold, an insurer were to encounter financial difficulty, a broker would arguably face liability for having recommended that insurer. One can already hear plaintiffs' attorneys arguing that the broker should have recommended a different carrier and that the consumer would never have selected that insurer but for the broker's recommendation.

7 In summary, this regulation attempts to impose on insurance brokers and agents without any basis in law a series of enormous duties and liabilities that they have never been required to assume, duties which are so poorly and ambiguously defined, so internally inconsistent, and so impossible to fulfill, that even the most proficient of insurance professionals, exercising an abundance of reasonable care, could never avoid liability. Page 9 For good reason, insurers that write errors-and-omissions insurance for agents and brokers have expressed significant concern about these proposed regulations. In the highly unlikely event that these regulations were actually adopted and implemented, it is difficult to imagine how they would not produce an immediate crisis in affordability and availability of E&O insurance for insurance professionals. The Commissioner has failed to justify any necessity whatsoever for these regulations; he mis-cites provisions of the California Insurance Code; he has no regulatory authority to create affirmative and radically new legal duties upon brokers and agents; and his regulations, as drafted, are hopelessly unclear and ambiguous. For all these reasons, we respectfully urge the Commissioner not to adopt the proposed regulations. Attached to this document, and incorporated into our testimony, is a more comprehensive legal analysis of the proposed regulations, prepared by our outside counsel, the San Francisco law firm of Keker & Van Nest, LLP. On behalf of the Insurance Brokers and Agents of the West, thank you for the opportunity to submit these comments on the Department s proposed regulations. If you have any questions concerning our testimony, or if we can provide any other assistance, please do not hesitate to contact me. Very truly yours, Stephen L. Young Stephen L. Young Senior Vice President and General Counsel Enc.