On November 17 the Second U.S. Court of Appeals vacated a lower court’s ruling dismissing a 2004 shareholder lawsuit against Hartford Financial Services Group Inc. over contingent commissions paid to insurance brokers. The appeals court decided that the statute of limitations did not apply to the case, which was remanded to the lower court. In 2006 U.S. District Judge Christopher Droney in Hartford, Connecticut, dismissed the lawsuit, which is based on allegations that investors acquired the company’s stock at artificially inflated prices because of improper fees paid to insurance brokers in addition to ordinary commission fees. In a statement, Hartford said it continues to believe those allegations in the suit are completely meritless. “There has been no decision on the merits of the allegations,” spokeswoman Debora Raymond said.

This federal civil suit is separate from a case before the 1st Appellate Division of the New York Supreme Court, in which the court declared on June 19, 2008 that contingent commission agreements are not illegal. The case stemmed from a May 2006 fraud and bid-rigging suit originally filed against Liberty Mutual by former New York Attorney General Eliot Spitzer. While other insurers and mega-brokers faced investigations of similar allegations since 2004 and opted to settle with Spitzer and other state authorities, Liberty Mutual vowed to fight the allegations in court. Some of the settlements banned the payment of contingent commissions, while others mandated the use of a disclosure form that was legally flawed and would place agents at risk of errors and omissions claims.

“Contingent commission agreements between brokers and insurers are not illegal, and, in the absence of a special relationship between the parties, defendant(s) had no duty to disclose the existence of the contingent commission agreement,” the court said in its ruling. Several other court decisions in 2007 also found to be baseless allegations that carriers’ contingency compensation programs constituted a conflict of interest and are illegal. 

In a statement at the time, then-PIA National President-elect Kenneth R. Auerbach, Esq. commented, “This marks the end of the Spitzer era.” Auerbach added that PIA appreciates the fact that Liberty Mutual decided not to enter into a settlement as other carriers did, opting instead to fight in court. “PIA agents are grateful to Liberty Mutual for remaining steadfast, being our allies in support of common sense and fighting for what is right.”

PIA Hails Court Decision Declaring Contingent Commissions Not Illegal (7/1/07)

Decisions on Contingent Commissions a Major Win for PIA Agents  (10/10/07)

November 25, 2008