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Court Rules Contingent Commissions Not Fiduciary Breach

Brokers that accept contingent commissions are not in breach of their fiduciary duties to their clients under Missouri law, the Missouri Supreme Court has ruled
March 13, 2012

Brokers that accept contingent commissions are not in breach of their fiduciary duties to their clients under Missouri law, the Missouri Supreme Court has ruled. The high court also held on March 6 in Emerson Electric Co. vs. Marsh & McLennan Cos. Inc. et al. that brokers have no duty to their clients to find insurance at the lowest possible cost available, and that they do not breach fiduciary duty by earning interest on premium payments sent to them before the payments are sent on to the insurer.

But the court remanded the case to St. Louis Circuit Court for further consideration, saying that the lower court erred in its October 2010 ruling when it said that Emerson could not recover on one or more of its claims as a matter of law. Despite the remand, legal experts say the ruling is significant. Speaking to Business Insurance, “The court said, ‘Look, brokers do not have a fiduciary duty or duty of loyalty that prohibits them from receiving contingent commissions or that requires them to disclose them,'” said Christopher J. St. Jeanos, a partner at Willkie Farr & Gallagher L.L.P. in New York, an attorney who represented Marsh.

This is the latest in a series of court decisions dating back to 2007 in which courts have held that it is not illegal to be paid, or to accept, contingent commissions. The controversy surrounding contingent compensation dated to 2004, when then-New York Attorney General Eliot Spitzer investigated bid-rigging and client-steering allegations against a handful of insurers and mega-brokers, then negotiated settlement agreements in which they agreed to forgo contingent commissions, without admitting any wrongdoing.

Independent insurance agents were never suspected of any wrongdoing, but they were lumped into the Spitzer settlements. Then, to add insult to our injury, some of those suspected of wrongdoing subsequently had the sanctions against them reduced – while the restrictions on Main Street agents were kept in place! In short, Main Street agents were being punished for the suspected wrongdoing of others when they did nothing wrong. And mega-brokers were actually granted a competitive advantage over independent agents by getting their own sanctions lifted, while having them kept in place on independent agents who should never have been included in the first place.

PIA National has been successfully fighting for the right of our carriers to utilize contingent compensation and for PIA members to receive it since 2004.

PIA challenged the settlement agreements, filing an amicus brief in federal district court. Ultimately, the court agreed and declared contingent commissions legal. Separately, PIA was the only insurance trade association that provided the NAIC with the correct way to draft a producer compensation disclosure model and, when they did not act on our advice, we opposed their disclosure in the states. As a result, no state ever adopted the flawed NAIC disclosure model.

“Efforts to ban contingent commissions, yearly bonuses, or any form of incentive compensation must be seen for what they are: anti-competitive attacks on how our American Free Enterprise System operates,” said then-PIA National President Donna L. Pile in 2007.

Read the Missouri courts decision on contingent commissions: Contingent Commissions Not Fiduciary Breach: Court (Business Insurance 3/7/12)

Read PIA's obituary for controversy surrounding contingent commissions: Rest in Peace: Agents Move On From Contingent Commission Controversy (PIA 8/3/11)