State Targets Insurers’ Practices

Amid a widening industry investigation, Insurance Commissioner John Garamendi today will unveil new regulations aimed at eliminating conflicts of interest in the selling of insurance policies.

The rules would penalize any broker “who places his or her own financial or other interest above that of his or her own client,” according to a copy of the proposal. Brokers could be fined as much as $10,000 for each violation, and could also lose their licenses to sell insurance.

The regulations would require greater disclosure of the fees brokers receive from insurance companies for selling policies.

Garamendi said he expected to adopt the rules in the next two to four months, after public hearings and administrative review.

The California action comes six days after New York Atty. Gen. Eliot Spitzer filed a civil suit against Marsh & McLennan Cos., the world’s largest insurance broker, alleging that the firm conspired with insurance companies to inflate bids at the expense of clients.

Although he declined to provide details, Garamendi on Tuesday said he expected to soon file his own lawsuit targeting insurance practices. The Times reported last week that state authorities were investigating a San Diego insurance broker.

Garamendi said he had been examining alleged insurance company kickbacks to brokers for the last nine months in cooperation with Spitzer. The proposed regulations should encourage brokers and insurers to immediately cease any exchange of under-the-table commissions, he said.

“I am aggressively enforcing in this area,” he said.

But David Wood, a Camarillo attorney who represents companies in lawsuits against brokers and insurance companies, said new rules were useless without better enforcement.

“He’s grandstanding,” Wood said of the insurance commissioner. “Garamendi has not enforced regulations that are already there.”

Brian Perkins, the chief staff member on the state Senate Insurance Committee, said the rules could also backfire. Passing new regulations “could give folks the idea” that overcharging clients and concealing commissions was OK in the past, he said.

“The fastest way to put an end to something is to file actions against people,” Perkins said, suggesting that lawsuits would be more effective than rule changes.

Garamendi’s regulations would require brokers to provide their clients with coverage from “the best available insurer.” But the best policy can be a matter of opinion, especially when sorting out the complex needs of large organizations, said John Norwood, a lobbyist for Insurance Agents and Brokers of the West.

“Service is an issue, price is an issue and financial solvency of the insurance company is an issue,” Norwood said. “Depending on how you write this, an agent or broker could spend his life in court defending what’s ‘the best available’ company.”

California would be the first big state to require disclosure of specific commissions and fees, noted Joseph Annotti, vice president of the Property Casualty Insurers Assn. of America, who declined to comment on the details of Garamendi’s proposal.

Karen Oxman, a principal with GNW-Evergreen Insurance Services in Los Angeles, said greater disclosure was a small price to pay to regain consumer trust as the industry reels under the spotlight of the Spitzer probe. But Oxman said the disclosure of commissions could be a thorny issue, depending on how much detail would be required.

Consumer activist Douglas Heller said the proposal didn’t go far enough. Even if disclosed, commissions paid by insurers to brokers pose a conflict of interest and should be banned, said Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

Garamendi’s proposals revolve in part around the sometimes misunderstood role of brokers and agents in the selling of insurance.

Brokers are hired by big insurance buyers -- typically companies and other employers -- to negotiate on their behalf for the best policy. Brokers have a fiduciary duty to put their clients’ interests first.

Agents represent insurance companies. They are paid a commission from the company, but they may represent several insurers at a time, so they are often mistaken for brokers.

Under current law, brokers are required to say whether they are also collecting commissions, but industry critics say the disclosure is often obscure.

Garamendi’s proposal would require brokers to disclose “all material facts” regarding third-party compensation. Agents would be required to do the same if they make any representations to consumers that they are shopping around to get them the best deal.

Garamendi would not require commission disclosures from so-called captive agents, who represent just one company.

Lifsher reported from Sacramento, Kristof from Los Angeles.