The Decision of St. Paul Travelers Cos. Inc. to settle with attorneys general from New York, Connecticut, and Illinois on charges of bid rigging and inappropriate incentive practices has again got some insurance industry professionals wondering if the incentive compensation system is at risk.
In an August 3 statement following the announcement of the settlement, the 300,000-member Independent Insurance Agents & Brokers of America Inc. defended incentive sales practices and denounced “the continued assault on a legal compensation practice used in businesses all across America.”
At the same time, the IIABA praised Liberty Mutual Insurance Co. of Boston, which, unlike most insurance companies caught up in investigations into alleged anti-competitive practices, declined to settle a suit filed against it by New York Attorney General Eliot Spitzer and Connecticut Attorney General Richard Blumenthal.
“We applaud the lead taken by Liberty Mutual, which is standing up for free-market principles and the right to provide incentive compensation for its distribution force,” said IIABA CEO Robert A. Rusbuldt, in the statement. “We do not believe that illegal activities, which should be pursued and prosecuted, should be confused with sound free-market sales practices, including the use of incentive compensation.”
Among the charges levied against Liberty Mutual is that it illegally paid contingent commissions to brokers and independent insurance agents in order to give them an incentive to steer business to the company. However, Liberty Mutual has denied all allegations of wrongdoing regarding commission payments and reinsurance brokering, stating that the company's conduct in both areas was appropriate and lawful.
“There is a big distinction between individual misconduct and corporate misconduct,” says Debra Perkins, IIABA's executive vice president and general counsel, arguing that Liberty Mutual should not be punished for the actions of a few employees.
“Our position is quite strong,” she says. “There are some individuals in our industry who do abuse the system or engage in inappropriate conduct. That doesn't mean there is something wrong with the whole system.”
Why then is Liberty Mutual the only company that's refused to settle? “All of the companies that have settled are public companies,” Perkins says. “The cloud of an investigation is a serious one, one they would want to put behind them — companies charged with criminal conduct usually don't succeed in the long run.”
David Bender, principal and managing partner of Wood & Bender LLP, a Ventura, Calif. — based law firm that specializes in advising policyholders on the interpretation and enforcement of business insurance policies, puts it this way: “There is an old adage, a bad settlement is better than a good lawsuit.”
Bender believes the incentive compensation system is not the issue. Instead, he sees a disturbing trend in which more and more brokers and agents are in breach of their obligation to act in their clients' best interests.
“The problem is nondisclosure,” he says. “If a carrier says [to an agent or broker] ‘We will incentivize you to steer our policy,’ I think that's just the way the market works, and I don't have a problem with that. Where it becomes problematic is if it's not disclosed to the person who is buying the insurance.
“My clients, aren't bothered [by incentive compensation] if they get what they pay for,” adds Bender. Problems are caused by agents and brokers who do not disclose incentive compensation, he stresses, particularly when they have sold inferior policies.