ALI-ABA Conference on Life Insurance Company Products: Current Securities, Tax, ERISA, and State Regulatory and Compliance Issues

Transcription

1 ALI-ABA Conference on Life Insurance Company Products: Current Securities, Tax, ERISA, and State Regulatory and Compliance Issues WASHINGTON, DC November 3-4, 2005 STATE REGULATORY DEVELOPMENTS, COMPENSATION DISCLOSURE, INSURABLE INTEREST AND PRODUCT FILINGS ROBERT B. SHAPIRO, ESQUIRE JORDEN BURT LLP 1025 THOMAS JEFFERSON STREET, N.W. SUITE 400 EAST WASHINGTON, DC (202) FAX: (202)

2 I. Recent Developments in Producer Compensation Disclosure and Related Actions Commencing in the summer of 2004, New York State Attorney General Eliot Spitzer began investigating the insurance brokerage industry and the relationship between the compensation brokers and their firms receive for the production of business and the insurers that underwrite that business. In certain instances, the investigation found that business was being steered to certain insurers that were not chosen because they provided the best overall product for the insured s needs. Another complaint by General Spitzer was that the mere receipt of fees from an insurer as additional compensation by a broker supposedly serving the best interests of the insured creates a conflict of interest. Although at the time of the investigation and subsequent complaint filed against some of the largest brokerage firms in the insurance industry no states had laws prohibited the receipt of additional compensation by brokers, every firm that had engaged in the practice of receiving additional fees from insurers whether for producing a certain volume of business or on the basis of the experience of the business placed with the compensating insurer ended such arrangements as a result of the Spitzer investigation. The following sections review the Spitzer complaint, what the state of the law was at the time of the complaint, what the NAIC and individual states have done since the Spitzer complaint and the various lawsuits that are pending as a result of the investigations by Generals Spitzer, Blumenthal (CT) and other state Insurance Commissioners. A. Overview of New York Atty. Gen. Eliot Spitzer s Action Against Marsh 1. The Complaint New York Attorney General, Eliot Spitzer, filed a complaint against Marsh and McLennan Co., Inc. and Marsh Inc. (Collectively Marsh) on October 14, 2004, asserting claims of: (1) Fraudulent Business Practices under New York Executive Law 63(12); (2) Antitrust violations under New York General Business Law Sec. 340 et seq.; (3) Securities Fraud under New York General Business Law Sec 352-c; (4) Securities Violation under General Business Law Sec. 352 (5) Unjust Enrichment; and (6) Common Law Fraud. The complaint claimed that Marsh, the largest provider of insurance brokerage and consulting services in the world, has a business plan that revolves around receipt of contingent commissions from insurance companies. In exchange, Marsh shields these companies from competition, steers business to these particular companies, and threatens companies that actually think of engaging in true competition for a particular piece of business. Marsh fulfills this through providing their clients with false and inflated quotes when their clients are in the midst of choosing a policy, and encouraging and rewarding employees who sell products of insurance companies that paid commissions to Marsh. Furthermore, the complaint claims that Marsh misrepresents to its clients, and even investors, the nature of these commissions by calling them market services arrangements that deal with services, which according to the complaint are illusory. The complaint cites numerous insurance companies, including American International Group (AIG), ACE, The Hartford and Munich American Risk Partners, as 2

3 participants of Marsh s steering scheme. As a result of this scheme, in 2003 alone, contingent commission payments amounted to approximately $800 million of Marsh s $1.5 billion earnings. 2. The Immediate Results In response to this lawsuit, Marsh settled with Spitzer for $850 million, payable in 4 years, which will compensate clients who have retained Marsh as their broker in between January 1, 2001 and December 31, Under the settlement terms, Marsh neither admits nor denies the allegations found in the complaint. Further, on October 26, 2004, Marsh announced that it is permanently abolishing its practice of receiving contingent commission from insurers. To date, agreements have not yet been reached with ACE, AIG, Zurich or Liberty. Furthermore, there were numerous additional repercussions resulting from Spitzer s investigations. First, numerous high-level officers stepped-down as a result of this investigation. The list includes (1) Jeffrey Greenberg, Marsh s Chairman and CEO; (2) Roger Egan, Marsh s President and Chief Operating Officer; and (3) Christopher Treanor, chairman of Marsh Inc. and chief of Global Placement. Five members of Marsh s board of directors have also resigned. Lastly, to date, 17 individuals, including eight former Marsh employees and nine other individuals from four other companies, have pleaded guilty to criminal charges. Second, Marsh financial picture suffered a downturn. Marsh announced that it plans to reduce its staff by 5%. Moreover, the company s third-quarter earnings fell by 94%, compared to the same quarter the year before the investigations took place. Third, Attorney Generals and Insurance Departments from other states launched their own investigation. After issuing numerous subpoenas, Connecticut Attorney General Richard Blumenthal filed a complaint on January 21, 2005, accusing MMC and a unit of Bermuda insurer ACE Ltd for allegedly colluding in order to obtain an $80 million contract for the state s workers compensation insurance. Another example is the California Department of Insurance, when its commissioner John Garamendi filed a lawsuit against ULR on November 18, 2004, and immediately reached a settlement with the company. Fourth, the investigation on Marsh also led to numerous investigations not only against Marsh itself, but also other broker companies. For example, on November 12, 2004, Spitzer sued Universal Life Resources, Inc. (ULR), a consulting firm specializing in life, accident and disability insurance. The complaint, containing similar allegations against ULR as that of the one found in the complaint against Marsh, states five causes of action including (1) violation of statutory laws that include New York General Bus. Law 340 and 349 and Insurance Law 2119 and 2123; (2) Unreasonable Restraint of Trade and Commerce under Donnelly Act, Gen. Bus. L. 340; (3) Engaging in Deceptive Acts and Practices; (4) Unjust Enrichment and (5) Actual and Constructive Fraud. The latest outcome of this saga consists of a 37-count indictment, announced on September 15, 2005, against eight former Marsh executives for their role in the bid-rigging scheme. The indictment charged all eight executive with allegations of (1) participating in a Scheme to Defraud in the First Degree and (2) a Combination in Restraint of Trade and Competition. Furthermore it charges 5 executives with various counts of Grand Larceny in the 3

4 First, Second and Third Degrees, while charging the additional 3 executives with various counts of Grand Larceny in the Second Degrees. If convicted with the top count on which they are individually charged, Grand Larceny in the First Degree entails a minimum of one to three years in state prison and a maximum of twenty-five years while Grand Larceny in the Second Degree carries a maximum term of 15 years. B. Statutory Law Present at the Time of Spitzer s Charge Against Marsh 1. California California has narrow disclosure statutes that impose duties on specific kinds of producers. Ins. Statute 778.2, which was enacted in 1983, requires an agent or broker who participates in premium financing agreements to disclose to the insured the amount of compensation received from the premium financing company, to maintain records of this information for 3 years, and to make these records available to the Commissioner. Furthermore, Ins. Statute requires controlling producers to deliver a written notice to a prospective insured before the effective date of the policy. The written notice shall disclose the relationship between the controlling producer and the controlled insurer. 2. New York In 1998, New York s Department of Insurance issued Circular Letter 22, which requires compensation arrangements between an insurer and a broker to be written and disclosed to the insured prior to the purchase of the policy. The Circular explains that fees paid by insurers to brokers are factors considered in creating the insurer s premium rates. Furthermore, the Circular clarifies the broker s role as a representative of the insured, and thus nondisclosure of additional compensation from an insurer is sufficient to create the perception that brokers are conflicted in their loyalties. 1 This conflict of interest can be considered as a dishonest practice, constituting a violation of Section 2110 of New York s Insurance law. Pursuant to this Section, the Insurance Department Superintendent can revoke, suspend, or refuse to renew an insurance broker s license if, after a hearing, there is a finding that the broker has demonstrated his or her untrustworthiness to act in that capacity. 3. Washington WAC states that it is an unfair practice for any broker who provides services in connection with the procurement of insurance to charge a fee in excess of the usual commission if the broker does not give the insured written disclosures regarding the amount of the commission or the basis used in determining the amount. C. NAIC s Involvement 1. History of NAIC s Involvement 1 Letter from Bonnie Steingart, Deputy Superintendent & General Counsel, N.Y. Ins. Dept., to All Licensed Brokers and Property/Casualty Insurers (Aug. 25, 1998) (on file on cl98_22.htm. 4

5 The National Association of Insurance Commissioners (NAIC) decided to take action in response to Atty. Gen. Spitzer s investigations. NAIC formed an Executive Task Force on Broker Activities ( Task Force ), which is comprised of 14 states that would develop a coordinated approach to evaluate and address the issues raised in various regulatory and law enforcement investigations of producer compensation. 2 The Task Force s three-part plan included amending the Producer Licensing Model Act 3 to require disclosure of producer compensation information. In mid-november 2004, the Task Force received more than 100 oral and written recommendations from various state regulators when it developed an initial draft of the legislation. Frequent meetings were held, including 2 public hearings during the NAIC s 2004 Winter National Meeting. On December 29, 2004, the NAIC passed the draft amendment. Fifteen states, namely ND, OK, PR, SD, TN, WV, AR, Al, FL, ID, KY, MD, NE, NV, and AK voted against the Amendment. Most of these states were concerned that the amendment was too broad, with the exception of Florida, which thought that the amendment was too weak. 2. NAIC s Compensation Disclosure Amendment The amendment, (Exhibit 1), applies to producers (1) who receive compensation, above the nominal amount established, from their clients or (2) who are not paid directly by the clients but are representing the client (as opposed to the insurer). A producer is an individual or a business entity licensed under state law to sell, solicit or negotiate insurance. The amendment also applies to captive agents (producers who represent one insurer exclusively) and independent producers. The amendment does not apply to the following individuals: a. producers who are not paid directly by the customer and represent an insurer. A producer represents an insurer if the insurer (a) appoints the producer, or (b) has contracted with the producer to act as its agent (in states that have no appointment process). Producers that are representing the insurer should still disclose to the client that he is receiving compensation from the insurer and that he is providing services to the client on behalf of the insurer. b. a licensed producer who only acts as an intermediary between the insurer and the client s own producer. Examples include a managing general agent, a sales manager or a wholesale broker. They are exempted because they do not have direct contact with the person involved in the purchase of the insurance. for reinsurance. c. reinsurance intermediaries, for example, a managing underwriter 2 Broker Compensation FAQ, National Association of Insurance Commissioners, committees_ex_broker_faq.htm. 3 See id. (describing the other two action plans being facilitation of regulatory coordination through the development of uniform templates for the states to use in collecting information from insurers and/or producers; and establishment of an on-line fraud reporting mechanism to allow for the anonymous reporting of tips of unscrupulous business practices for investigation by state insurance departments). 5