Calling secret insurance broker commissions a “serious problem that betrays the public’s trust,” California Insurance Commissioner John Garamendi announced new regulations Wednesday to require agents and brokers to disclose any financial incentive they would receive for selling certain insurance products and steering business to specific companies.

Targeting a practice in the insurance industry that has sparked a national controversy and criminal charges against industry executives, Commissioner Garamendi said his proposal would help clarify and strengthen the laws prohibiting these practices.

The real estate connection may not be far off. Mortgage brokers often steer business to particular lenders in exchange for compensation. While the compensation should be disclosed, it is often fuzzy and still represents payment for directing business to particular lenders.

In response to the insurance industry controversy, Garamendi said: “When consumers place their trust in the hands of (insurance) agents and brokers to find them the best policy at the best price, they should know if a backroom deal has already been struck.” Commissioner Garamendi said. “My ongoing investigation will expose these under-the-table kickbacks that are not in the best interest of consumers.”

The regulations were released Wednesday for public review, after which they must gain the approval of the state’s Office of Administrative Law. Garamendi’s proposal covers various requirements for insurance agents and brokers, including:

  • A broker must disclose to a client all material facts surrounding the broker’s receipt or potential receipt of income from a third party, which income derives in whole or in part from a transaction on behalf of the client.
  • A broker may not places his or her own financial or other interest above that of the client.
  • A broker violates the Insurance Code if he or she fails to provide the client with the proposal of a best available insurer, advises a client to select an insurer other than the one best available, advises a client not to select a best available insurer from among multiple insurers, or fails to take reasonable measures to obtain a quote from an insurer that might be the best available to the consumer.

Garamendi ordered the drafting of the regulations in March after the practice drew scrutiny from a foundation critical of the incentive commission practice. At that time, he also initiated an investigation of the industry in California to assess the extent of this practice, and to determine the need for any ensuing regulatory or legal action. 

New York Attorney General Eliot Spitzer recently accused the world’s largest insurance broker of steering clients to major insurance companies that had paid it large “contingent commissions.” He is pursuing civil and criminal actions in his investigation of the insurance industry, and three executives have already pleaded guilty to charges in the case.

Under Commissioner Garamendi’s proposed regulations, failure to comply could result in fines of up to $10,000 per incident, issuance of a cease-and-desist order and the possibility of license loss or suspension.


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