The Pfundstein Report
Now that the world’s worst-kept secret is out - New York attorney General Elliot Spitzer is running for governor of that state — regulators nationwide are starting to comb through reams of documents filed in response to their request for insurance producer compensation information. The regulators requested home-based insurance companies and certain insurance agencies to respond to a series of questions concerning the issue. The NAIC has now formally adopted a model act designed to provide increased transparency and disclosure about compensation payments in the sale of insurance. Transparency and disclosure are laudable goals, but like all things in life — particularly life in a regulated industry — the devil is truly in the details. The NAIC’s model act would amend the Uniform Producer Licensing Act, which was adopted in New Hampshire as RSA 402-J. Unfortunately, the new NAIC model erodes the essential distinction between an insurance agent and an insurance broker. Confusingly, both are properly referred to as insurance producers. There are important differences. An insurance agent is the representative of the insurance company, whereas a broker is the representative of the customer. The relevant inquiry concerning disclosure of producer compensation should depend on whether the producer is being paid by both sides of the transaction. The newly adopted NAIC model requires an insurance agent who does not receive any compensation from the customer and works as the representative of the insurer to disclose that the agent will be paid by the insurer or alternatively that the agent represents the insurer. These disclosures are meaningless. They do not provide any useful information to a consumer. In short, they provide no value to the insurance-consuming public but create potential compliance pitfalls for insurance producers and the companies with whom they place coverage. Let’s look at other similar situations. If you recently bought a wide-screen TV or HDTV to watch the Super Bowl (I wish!), you probably worked with an energetic salesperson. This salesperson probably outlined a number of choices for you. No law requires the salesperson to tell you he or she was being paid by the store, the TV manufacturer, distributor or some other party. Would you have made a better decision concerning purchasing your new TV had a law required the salesperson to tell you she was getting paid by the store or manufacturer, or if you bought a really expensive TV, that she might even get paid more for the sale? Consider the auto dealership context. Does the salesperson tell you, “I get paid more if you buy all these bells and whistles?” How about a service contract or enhanced warranty to go along with your new vehicle? Do you think the salesperson represents you in the transaction? Of course not. Having an insurance agent who represents an insurance company tell you the agent gets paid by the insurance company or that he or she represents the insurance company does not provide any meaningful information. However, if the insurance producer was being paid by you, there should be enhanced transparency, disclosure and your consent before actually also being paid by the insurer or some third party. The principle is that the producer should not be serving two masters with conflicting interests without adequate and full disclosure to the customer. The NAIC model achieves this goal. However, in doing so, it also imposes the requirement on agents without improving the value of the information available at the point of sale. In my view, this is a mistake and should be adjusted prior to final enactment by the Legislature. Donald J. Pfundstein is managing director of the Concord law firm of Gallagher, Callahan & Gartrell. He can be reached at firstname.lastname@example.org.