Timeline March 2006 — Twelve state AGs and DOIs announce the first set of a series of intertwined multi-state settlements involving alleged insurer actions connected to the 2004 broker compensation and competitive practice actions. PIA provides detailed comments to Zurich at Zurich’s request, especially regarding the per transaction producer compensation disclosure. April 9, 2006 — Zurich executives appear before the PIA National Board of Directors and present the details of their three different, but connected, settlements and their accompanying imposed business reforms. April 2006 — Multiple plaintiffs’ lawsuits have been filed in the wake of actions by New York Attorney General Eliot Spitzer and other officials. These are certified as part of a universal class action to be heard in U.S. District Court for the District of New Jersey. Both Zurich and Travelers are named as defendants in the Commercial Class Action Complaint, which seeks both damages and injunctive relief, including injunctive relief to “restore competition” and “cure the inherent and irreconcilable conflict of interest created by the existence of the Contingent Commissions.” Federal District Judge Faith S. Hochberg must determine whether the terms of the proposed settlement are “fair, reasonable and adequate” to absent class members. July 31, 2006 — Plaintiffs’ counsel and Zurich reach a proposed settlement of the commercial class action. September 15, 2006 — PIA files the first brief of amicus curiae with the United States District Court for the District of New Jersey, in opposition to certain limited aspects of the proposed settlement. September 26, 2006 — Attorneys General of ten states file a motion in opposition to PIA’s amicus curiae, asking the Court not to hear it at this time. September 26, 2006 — Attorneys for Zurich Insurers send a letter to Judge Hochberg, confirming PIA’s assertion that what is being sought is approval of a broad, global, “nationwide” settlement that folds all details of existing proposed agreements into a comprehensive settlement, including a selective ban on the payment of certain contingent commissions. This contradicts the AGs assertion that the proceeding is dealing with narrow issues. October 6, 2006 — PIA files a formal reply to the AGs motion, asking the Court to delay preliminary approval of the class settlement until flaws in the mandatory disclosure statement are corrected. PIA says arguments in the AGs motion “lack merit and appear designed to evade PIA’s legitimate concerns.”

On September 15, 2006, PIA filed an amicus curiae brief with the United States District Court for the District of New Jersey, in opposition to certain limited aspects of a proposed class settlement involving Zurich Insurers.

PIA’s objections to the proposed settlement center on a selective ban on the payment of contingent commissions, along with the mandated use of a flawed disclosure statement that creates legal conflicts.

“A key mission of PIA is to defend the integrity of our members and protect their business interests,” said PIA Executive Vice President & CEO Len Brevik.

“The alleged abuses that led to these settlements were not committed by Main Street insurance agents,” Brevik said. “Regrettably, this proposed settlement and others like it attempt to create a remedy for alleged wrongdoing and then impose it on those who were not involved in any wrongdoing. As a result, PIA is compelled to address these issues formally through our direct involvement in this class action, on behalf of our members and their business interests.”

“Certain provisions contained in these agreements are grossly unfair to PIA agents, and grossly unfair to carriers by restricting their ability to compensate their producers in a legal and honest manner,” he added.

Lack of Fairness

Starting in late 2004, several state Attorneys General announced that they had uncovered instances of alleged bid-rigging in dealings involving a handful of top-of-the-marketplace “Mega-brokers” in insurance. The resulting settlement agreements sought to ban certain contingent commissions. Terms in these settlements were then applied not just to the Mega-brokers in question, but broadly to include Main Street insurance agents, who had never been accused of wrongdoing.

Brevik added that PIA’s filing also addresses the broader issue of efforts by several Attorneys General to use the settlement process to compel support for changing the way American business operates by attempting to make incentive compensation illegal.  In the case of the proposed settlement involving Zurich, this includes a provision requiring the company to “support legislation and regulations in the United States to abolish Contingent Compensation for insurance products or lines.”

“State Attorneys General should not usurp the policymaking authority of state legislatures,” Brevik said. “Specifically, they should not use their powers in an effort to bring about a fundamental change in the American system of free enterprise. Performance-based compensation is not a threat to that system, it is the basis of that system.”

The PIA filing also notes that several of the original settlements reached in 2004 have, in recent weeks, been amended by state Attorneys General to liberalize earlier prohibitions against receiving any contingency earnings, in signed settlements involving Marsh, Aon and Willis, among others — while not changing aspects of settlements that may adversely impact Main Street agents, who were never accused of any wrongdoing.

“These voluntary settlement agreements, which are not truly voluntary, are being entered into by carriers under threat of legal sanction by various state Attorneys General,” said PIA National President-elect Donna Pile. “Provisions in these settlements place the burden of these sanctions squarely on the shoulders of the local Main Street agents, creating an enormous financial strain on our PIA agencies. It is dangerously disconcerting that the Main Street agent force is paying the price for a few wrongdoers from a totally different arena. This is not due process.”

Flawed Disclosure

As part of the proposed settlement of a class action lawsuit filed in August 2005, which was prompted by investigations of alleged bid-rigging conducted by several state Attorneys General, independent agents would be required to use a court-mandated Mandatory Disclosure Statement that is inaccurate, violates existing state and common law and is rife with serious and fatal flaws. While pointing out to the court that PIA has no intent to obstruct the consummation of the Zurich Class Settlement, nevertheless “any perceived need for expediting the settlement process cannot justify the serious and fatal flaws” in the mandated disclosure statement.

“PIA tried to participate in the drafting of the Mandatory Disclosure Statement, but was unfairly locked out of those negotiations,” said PIA National Vice President/Treasurer Kenneth R. Auerbach, Esq. “Unfortunately, the carriers involved in this process are in no position to make modifications to these imposed results. So, the system left PIA with no other option to be heard. PIA is compelled to file our comments together with our proposed changes to the disclosure statement directly with the court, as a friend of the court, for its consideration.”

Ten State AGs Oppose PIA Amicus

As might be expected, the ten Attorneys General did not agree with PIA. On September 27, 2006, the AGs filed a motion with the U.S. District Court formally opposing PIA’s amicus brief.

The Attorneys General of the States of California, Florida, Hawaii, Maryland, Oregon, Texas and West Virginia and the Commonwealths of Massachusetts, Pennsylvania and Virginia contended that the filing of PIA’s Brief of Amicus Curiae is premature at this stage of the litigation.

“We have ten AGs opposing us because we have filed the first and most complete brief defending Main Street agents,” said PIA’s Brevik immediately after the filing. PIA filed a response the next week.

The AGs filing contended that “PIA’s concerns are more properly reserved for the final fairness hearing – not preliminary approval.” It also states, “PIA’s objections have little to do with the reasonableness of the Settlement, and focus instead on the scope and proper interpretation of the Disclosure Form. These objections are more appropriately raised and considered at the final approval hearing...”

“It is not fair to relegate the concerns of professional insurance agents to a late-stage, final fairness hearing,” Brevik commented.

“Since there hasn’t been fairness for agents since the beginning of this process, we are not confident that there will be now,” he said. “Far from being premature, PIA’s participation has been blocked. From the start, PIA agents were rebuffed in all of our attempts to participate in the negotiations that brought this proposed settlement to this point.  Now that we have brought our objections directly to the court, the AGs want to relegate agents and their concerns to the back of the bus.”

The day after the Attorneys General filed their motion, attorneys for Zurich sent a detailed letter to presiding Judge Faith S. Hochberg. In it, Zurich said that PIA’s brief is premature and also argued against the AGs by stipulating the scope of issues before the Court in this settlement was much broader than the AGs contend it is. Zurich acknowledged that it intends for the full set of issues to be presented before and approved by this court, so they achieve a global settlement applied in all states, not just the ten in question.

PIA is not blaming the carriers for this situation. We filed our brief in order to help the court understand why our members cannot use the proposed disclosure form. Our complaint is with the process and the remedy proposed by the attorneys general, not with the carriers that have been unfairly leveraged and forced to submit to an unfair settlement.

Georgia Commissioner Won’t Sign On

In a keynote address to more than 500 agents during PIA of Georgia’s annual Education EXPO in Atlanta on September 26, Georgia Insurance Commissioner John W. Oxendine entered the fray. Oxendine said he will not sign on to recent controversial proposed settlement agreements with insurance companies — such as the one involving Zurich — which require that agents use a court-mandated form to disclose current and future commission levels to their insureds.

Oxendine stated that he “has no plans to require Georgia’s agents to take part” in the disclosure and felt it “served no worthwhile purpose.”

The Broader Issue

In taking these actions, PIA’s Main Street agents were doing more than simply standing up for their own business interests.

They entered the legal arena to oppose an unfair proposed settlement and by doing so, protect a guiding principle of the American system of free enterprise: the ability to pay salespeople compensation based on their performance.

Commissions, contingent or not, are a mainstay of our economy. In our industry, they also support critical, professional front line underwriting by agents to assure the financial health and solvency of insurers that we all rely on.

These settlements propose to fundamentally change the way in which most American businesses operate. Rather than attempting to bring about the elimination of incentive compensation as a means of discouraging abuses of the system, state Attorneys General should concentrate on policing such abuses.

“The day when it becomes illegal to sell on commission is the day when the American Free Enterprise System will have suffered a death blow,” Brevik said.

This article originally appeared in the October 2006 issue of PIA Connection.