Group Urges Calif., N.Y. Regulators to Probe Broker Practices

February 11, 2004

A conservative legal group has called for insurance regulators and attorneys general in California and New York to investigate conflicts of interest they say are caused by placement service agreements (PSAs) and the practice of “leveraging.”

The use of PSAs encourages brokers to steer customers to insurers that will profit the broker, but not necessarily benefit that customer, according to Daniel J. Popeo, the chairman and general counsel of the D.C.-based Washington Legal Foundation.

“This is a troubling trend in the insurance brokerage industry,” Popeo said. “Insurance brokers are paid to advocate for their customers, not themselves.”

PSAs compromise a broker’s duty to the client’s best interests by encouraging brokers to refer business only to companies that pay them handsome contingency fees, Popeo said. As a result, customers run the risk of paying more for coverage they do not need, and receiving less in terms of overall policy benefits.

The U.S. Securities and Exchange Commission has already uncovered widespread abuse of similar agreements in the mutual fund industry. And some are calling attention to the troubles with PSAs in the insurance industry.

A Jan. 13 J.P. Morgan report warned that PSAs “can create the appearance of factors other than the best interests of the insured being contemplated.” It also said that these agreements are likely to be scrutinized in 2004.

Until recently, these conflicts of interest have lurked unseen, Popeo said. Often clients have not been appropriately informed of the agreements. However, even open disclosure of PSAs may not entirely solve the conflict of interest because clients would have to question whether the brokers’ recommendations were prompted by integrity or influence.

Insurance brokers have already been criticized for a similar second practice, called “leveraging” or “tying.” This is when brokers persuade insurance companies into handing over their reinsurance needs in exchange for future referrals for their primary insurance business.

In letters sent recently, WLF urged New York Attorney General Eliot Spitzer, New York Superintendent of Insurance Gregory V. Serio, California Attorney General Bill Lockyer and California Insurance Commissioner John Garamendi to investigate PSAs and consider action to address the supposed conflicts of interest.

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