Spotlight Widens to Consumer Market
After paying a broker $160 to get her a deal on auto insurance, Maria Vargas assumed that the policy she bought was the best available for the money.
Then her premiums shot up, and Vargas did some rate-checking on her own. To her surprise, some insurers that might have written cheaper policies weren’t considered by her broker.
The reason: Like most in California, her broker is also licensed as an agent. And typically, industry officials say, brokers write policies only with the limited number of companies they serve as agents.
“It is very upsetting,” said Vargas, a caregiver who tends an elderly woman in North Hollywood. She said she was likely to dump her agent and buy insurance directly from a discount company.
The broker-agent is one of many insurance industry institutions now under a spotlight amid broad investigations by New York Atty. Gen. Eliot Spitzer, California Atty. Gen. Bill Lockyer and California Insurance Commissioner John Garamendi.
Consumer activists say the dual status poses a conflict of interest because broker-agents are tempted to push policies based on the commissions they get from the insurers they represent.
“A lot of times, the agent can make more money by putting you in the wrong product,” said Bob Hunter, a former Texas insurance commissioner who is now director of insurance for the Consumer Federation of America.
“If I have two policies and one costs $1,000 and the other costs $2,000, I make twice as much by selling you the one that costs $2,000. If you’re an unsophisticated buyer, and I’m not the most ethical agent, I might do that.”
The vast majority of agents are too ethical -- and too practical -- to engage in such self-serving conduct, said Patty Lombard, a spokeswoman for Insurance Brokers and Agents of the West, an industry trade group. Taking advantage is likely to lead to defections, she noted, and brokers are more dependent on loyal clients for their livelihoods than they are on insurance companies.
Still, even industry officials concede there is a potential for divided loyalties.
“It’s not as easy as saying that you have one relationship with an individual,” said Andrew J. Valdivia, president of the trade group and an executive at White & Co. Insurance Inc. in Santa Monica. “You have business relationships with insurance companies, policyholders and clients. You have many masters, when you should serve just one -- the client.”
To address these concerns, Garamendi recently proposed changes to the state insurance code. Brokers and many agents would be required to disclose commissions from insurance companies to their clients. In addition, brokers could be subject to fines or the loss of their licenses if they didn’t show clients the “best available” offer or failed to take “reasonable measures to obtain a quote from an insurer that might be a best available insurer.”
Consumer advocate Douglas Heller said Garamendi should have gone further and called for separating the agent and broker functions.
“Brokers are meant to work for the insurance consumer. They should not be corrupted by the commission,” Heller said. “Anything short of severing the financial ties between brokers and insurance companies falls short of getting the job done.”
Consumers generally buy auto and homeowner insurance in one of three ways -- directly from discount companies like 21st Century Insurance Group and USAA; through “captive” agents, who represent just one company, such as Farmers Insurance or State Farm; and through “independent” broker-agents, who can represent dozens of companies.
Independent broker-agents have long filled dual roles as brokers for consumers and as agents for companies. About 12 years ago, California allowed them to obtain one broker-agent license. The practical effect of this was minor, industry officials say, since most were already doing both (albeit with two separate licenses).
Agent-broker James Armitage of Arroyo Insurance in Pasadena dismissed claims that there was an inherent conflict in his job. He said he typically waived his brokerage fee when writing a policy that would pay him a commission. Neither the state Insurance Department nor industry trade groups could say how frequently brokerage fees are waived, but Armitage believes it’s not uncommon.
A broker-agent not only can survey an array of companies to best suit a client’s needs, Armitage said, but also can collect a commission from the insurance company, so he can afford to waive the brokerage fee.
“It allows them to come to one person, explain what their needs are and get the job done,” Armitage said.
Brokers who do charge fees say clients get their money’s worth.
Vargas’ broker, Luisa del Valle of LDV Insurance in Van Nuys, said she charged Vargas a one-time $160 fee two years ago to set up her account, shop for policies and service the business. Because Vargas was simply renewing the policy this year, she didn’t charge another fee even though, she said, she spent hours on the phone with Vargas -- and with the insurer, Cabrillo General Insurance -- trying to discover why Vargas’ rate had gone up.
To be sure, Del Valle said, there are other insurers among the hundreds operating in California that may be able to write Vargas’ policy more cheaply, perhaps including Mercury General and USAA. But Del Valle isn’t an agent for these companies, so she said she didn’t check their rates on Vargas’ behalf.
“Maybe with Mercury she could get a better price,” Del Valle conceded. “I never said to her, ‘You won’t get any cheaper price.’ ”
Vargas said she was simply unaware that LDV sold policies from only a limited number of companies.
The Consumer Federation of America’s Hunter said that underscored a common complaint: Most people who hire brokers are unaware that they are also agents. They assume the broker is working for them and shopping a wide array of policies.
“If you go to only one agent or broker, you are really making a mistake,” Hunter said. “Even if they give you the best policy among their ambit of, say, 10 companies, there may be a better product available outside of the tent.”
Garamendi’s proposal might change that. It is expected to be hotly contested by the insurance industry.
“The industry has been fighting disclosure tooth and nail for 20 years,” Hunter said. “But who knows? Spitzer opened the door. Maybe it will get more serious consideration.”