Is It Right for Insurance Brokers to Make Money from Both Sides?

(MoneyWatch)  One of the slipperiest slopes in the insurance industry is the question of whether independent agents and brokers should take money from insurance companies while claiming they are "impartial" when they sell those insurers' policies to customers. This practice has led to charges, indictments, ruined reputations and fines for some of the biggest insurers in the business, such as Marsh & McLennan and American International Group.

Opinions run the gamut from risk managers at major companies who say it's unethical, to brokers who claim it's an important part of their income. The three biggest insurance brokers - Marsh, Aon and Willis - are banned from taking these commissions due to settlements they made with then New York Attorney General Eliot Spitzer. But smaller brokers can take money from insurers, thus giving them a competitive edge.

What's a broker to do when everyone is sending mixed signals? The New York State Insurance Department is about to publish agent and broker pay disclosure regulations that will force brokers to tell customers that they have the right to request information on how much the broker receives from an insurer to tout its products.

New York is the biggest regulator of insurance and now, as it did under Spitzer, is leading the way, albeit perhaps in the wrong direction. According to several sources, the new rules set a time limit: customers have to request the information within three years after a contract is issued. The rules also limit what they can find out regarding "quotes presented" to the customer rather than "quotes obtained" by the broker, thereby blurring the lines.

Even the architect of the new rules, Insurance Department Special Counsel Matthew Gaul, told insurance brokers at a symposium in September that "no one is particularly happy with the rule."

State attorneys general who have followed the Spitzer mold, like Connecticut's Richard Blumenthal, have waged war against the commissions that insurers pay to brokers, and are unlikely to justify these new rules. It's uncertain whether saying that "New York told me so" will cut it when he comes to serve that subpoena.

Just this week Blumenthal added another notch to his belt when he made one of the nation's leading property insurers, Hartford Financial, pay $1.3 million for engaging in "price fixing." But his real target is Marsh & McLennan's Guy Carpenter brokerage unit, which he accuses of being "the ringleader" in a scheme where Guy Carpenter would funnel business to select insurers in exchange for excessive fees and other benefits from the insurers.

The Guy Carpenter unit responded by saying that Blumenthal had a "fundamental misunderstanding" of practices that have been in place for as long as 50 years.

Blumenthal is not alone in misunderstanding the concept of taking money from both sides. As regards the public, it's going to be tough to pass the smell test. And any broker who takes money from both the insurer and the customer had better be sure not to violate someone's interpretation of the law in one state or another. But that's what high-priced, on-retainer legal talent is for, and sometimes even that doesn't work.