California Insurance Commissioner Announces New Regulations for Agents, Brokers

California Insurance Commissioner John Garamendi (D) on Wednesday announced new regulations that would require insurance agents and brokers to reveal all financial incentives received from insurers and to find the "best available" policies for clients, the San Diego Union-Tribune reports. Garamendi made the announcement as an investigation into the business practices of the insurance industry expanded nationwide this week (Calbreath, San Diego Union-Tribune, 10/21). Last week, New York Attorney General Eliot Spitzer (D) filed a civil lawsuit in state court against Marsh & McLennan that alleges the property-casualty insurance broker did not award contracts through competitive bidding as stated and fixed prices with insurers in some cases. Spitzer filed the lawsuit after he subpoenaed insurance brokers and carriers to examine a practice in which insurers reward brokers with contingent commissions when they reach volume or profitability targets on business the brokers provide for insurers. According to some critics, the practice provides insurance brokers with financial incentive to place clients with insurers that pay the largest commissions. Spitzer said that such anti-competitive practices, some of which are illegal, have contributed to insurance rate increases for businesses and individuals. Last week, Spitzer said that his fraud investigation would target "virtually every line of insurance," and health insurers Aetna and Cigna on Tuesday acknowledged that Spitzer had served them with subpoenas related to their business practices (Kaiser Daily Health Policy Report, 10/20). UnumProvident, the largest disability insurer in the United States, also has received a subpoena from Spitzer (Los Angeles Times, 10/21).

California Regulations
The new regulations announced by Garamendi would require insurance agents and brokers to "fully disclose any compensation they receive for selling a policy," according to the Union-Tribune. In addition, the regulation would mandate that insurance agents or brokers who do not work for a particular insurer could not direct clients to the policies of that insurer. The regulations also would state the financial responsibilities that insurance agents or brokers have to their clients. The regulations would penalize agents or brokers who fail to disclose to clients "all material facts" related to financial incentives that agents and brokers receive from insurers, as well as those who place "his or her own financial or other interest" above that of the client. Penalties could include fines of as much as $10,000 per violation and license revocation. "Brokers should look to serve the best interests of their client -- not line their own pockets with secret commissions for selling a certain brand of product," Garamendi said (San Diego Union-Tribune, 10/21). He added, "It's a very sad day for the insurance industry. We have opened the first couple of pages in a very long and sordid book" (Gosselin, Hartford Courant, 10/21). No other states have issued such regulations, according to the New York Times (Treaster, New York Times, 10/21).

California Investigation
Garamendi as early as Wednesday might announce that the state will hire San Diego-based class-action law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP to lead legal action against insurance brokers and carriers on behalf of clients who have not received the best prices and terms (Kaiser Daily Health Policy Report, 10/20). John Stoia, a partner at the practice, said that Garamendi had hired the law firm to determine whether the issue merits legal action. "If we believe violations have occurred, we will file one or more lawsuits on behalf of the California Insurance Department to stop these practices," Stoia said (New York Times, 10/21). Garamendi, who has said he will work with Spitzer in his investigation case, also said that he expects to "see virtually every line of insurance investigated." He said consumers and companies should receive reimbursement if investigations prove that insurance brokers and carriers had acted illegally (AP/Houston Chronicle, 10/20). According to the New York Times, California regulators might file suit against as many as six insurance brokers nationwide and as many as 12 insurers. The lawsuits likely will focus on insurance brokers and carriers that provide employee benefits, such as life and disability coverage, as well as other forms of coverage (New York Times, 10/21). Garamendi also said that he might propose legislation that would ban contingent commissions paid by insurers to insurance brokers (Hartford Courant, 10/21).

Connecticut Investigation
Meanwhile, Connecticut Attorney General Richard Blumenthal (D) "stepped up his investigation into health insurance companies" and other insurers that provide employee benefits, such as group life and disability coverage, according to the New York Times (New York Times, 10/21). Blumenthal launched his investigation in June and has focused on the business practices of health and automobile insurers (Masters, Washington Post, 10/21). Blumenthal began to issue subpoenas on Monday after he analyzed information obtained from letters of inquiry to 135 insurance brokers and carriers. On Wednesday, Blumenthal issued 10 additional subpoenas, which raised the total number to 30 (New York Times, 10/21). He said, "I was astonished and shocked by some of the conduct we uncovered" (Washington Post, 10/21). Blumenthal said that he plans to propose in the next state legislative session a series of reforms that would require insurance agents and brokers to disclose to clients financial arrangements with insurers and could limit or eliminate some commissions (Hartford Courant, 10/21).

Nationwide Participation
Insurance regulators from 46 states on Wednesday participated in a conference call to discuss the investigations into the insurance industry. The insurance industry in large part is regulated on the state level, and as a result, Spitzer "needs the cooperation of his counterparts in other states ... to force industrywide change," the Post reports. The conference call on Wednesday was the first in a series to coordinate state investigations of the insurance industry (Washington Post, 10/21). After the conference call, insurance regulators said in a statement that they are "assessing the adequacy of current laws or regulations." According to the New York Times, insurance regulators were of aware of the "decades-old practice of payments to brokers from both their customers and the insurers" and were "caught off guard by Mr. Spitzer's portrayal of the industry" (New York Times, 10/21). However, according to the Union-Tribune, insurance regulators in Massachusetts, North Carolina, Ohio, Oregon, Pennsylvania and Texas have joined New York, California and Connecticut to investigate the issue (San Diego Union-Tribune, 10/21).

SEC Involvement?
Sources familiar with the investigations of the insurance industry said that the Securities and Exchange Commission "could become involved if insurance companies violated rules requiring disclosure of material information to investors," according to the Los Angeles Times. SEC Chair William Donaldson on Wednesday said that agency regulators would monitor the Spitzer investigation, but he added that the issue currently is "not under our purview" (Los Angeles Times, 10/21).

Editorial
According to a Journal editorial, "There's no doubt Mr. Spitzer has discovered bad behavior in so-called bid-rigging by insurance brokers," but his "goal seems to be nothing short of altering the way insurance brokers make their money." As a result, Spitzer is "portraying as 'fraudulent' business practices that are long-standing and well known," the editorial states, adding that "there is something troubling about a public official unilaterally deciding that an industry's business model must change -- especially when other regulators have blessed it for years." The editorial concludes that although Spitzer "increasingly views himself as all three branches of government -- legislator, regulator and judge," he "has yet to explain how the public benefits from having one man set the rules, with little debate and no political check or balance" (Wall Street Journal, 10/21).