Insurers To Move Away From "Contingent Commissions"

Insurers To Move Away From "Contingent Commissions"

Attorney General Eliot Spitzer today announced that his office, under agreements reached over the last year, has notified four leading insurance companies that they can no longer pay controversial "contingent commissions" to agents and brokers that sell automobile, homeowners and certain other insurance products to consumers.

This notice comes as part of settlements that each of the insurers – ACE, AIG, St. Paul Travelers and Zurich – entered into earlier this year, resolving charges of bid rigging and other improprieties related to contingent commissions, a previously undisclosed form of compensation that was found to have led brokers and agents to put their own interests ahead of their clients'.

The Attorney General’s Office investigation, which began in 2004, revealed that insurers paid contingent commissions to insurance agents and brokers, causing them to breach their fiduciary duties to their clients by steering business to the insurers even when their clients would have been better served by purchasing coverage from other insurers.

Under the settlement agreements, the insurers must change their compensation structure for brokers and agents in any type of insurance where more than 65% of the insurance is sold by companies that do not pay contingent commissions, including those that have signed agreements with the Attorney General. Spitzer today sent the companies formal notice that this 65% "tipping point" has been reached for homeowners, personal automobile, boiler and machinery, and financial guaranty insurance. As a result, the four companies must stop paying contingent commissions for these insurance products beginning on January 1, 2007. They have already given them up for excess casualty insurance.

Connecticut Attorney General Richard Blumenthal and Illinois Attorney General Lisa Madigan also joined in today’s notices sent to ACE, St. Paul Travelers and Zurich. The Connecticut and Illinois Attorneys General participated with New York in the agreements signed with those insurance companies.

The settlement agreements were negotiated by Assistant Attorneys General Maria Filipakis, Matthew Gaul and Melvin Goldberg of the Investment Protection and Consumer Frauds Bureaus, under the supervision of Investment Protection Bureau Chief David Brown IV.

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