Garamendi Defends Proposal For Complete Disclosure


California Insurance Commissioner John Garamendi defended his proposed regulation for full and complete disclosure of payments made by insurers to producers in testimony before a Senate subcommittee.

In his opening statement, Garamendi defended his proposed regulation as prompted by the wrongdoing found by New York Attorney General Eliot Spitzer in his investigation of insurance brokers.

The obligations for full disclosure “should be absolutely uncontroversial and should not be opposed by anyone interested in a fair, competitive, open market for insurance,” Garamendi testified. “As I have said, I believe that they merely clarify and make more specific what the law now requires.”

He continued, “With respect to disclosure of the amount of commissions, brokers and agents will ask, Why should we have to disclose the amount of our commissions? Most salesmen sell on commission, yet they are not required to disclose the source and amount of the compensation they receive.”

The answer, he said, “is that buying insurance is not like buying groceries. Securities brokers and real estate brokers are required to disclose the source and amount of their commissions, and so should insurance brokers and agents.

“You will be asked, Who do these obligations apply to? Only to brokers? Or to brokers and agents?” Garamendi said, noting that in California, “we have one license that permits a person to act as a broker or an agent. There are different requirements in different states. Our definition of who these obligations apply to is simple: Anyone who represents more than one insurer, or anyone who holds him or herself out as acting on behalf of the prospective insured, must abide by these requirements.”

Garamendi said the language of the regulation may change, but the basic intent is to require disclosure of all compensation a broker receives from any party, including any insurer, in connection with the placement of insurance on behalf of a client.

The objective, Garamendi testified, is to prohibit the broker from putting its own financial interest ahead of its clients interest by, for example:

–Failing to obtain quotes for insurance from a reasonable number of insurers able to meet the clients needs, because the broker has an agreement to receive compensation from some insurers, but not others;

–Failing to present an offer from an insurer able to meet the clients needs because the broker has an agreement to receive compensation from some other insurer;

–Recommending that a client accept an offer from an insurer because the broker has an agreement to receive compensation from that insurer, when another insurer has made a superior offer that better meets the clients needs.

Garamendi said, “Brokers and agents will complain, You are imposing an obligation to find the most suitable or best available insurance for a client. But there are many factors, not just price, that go into determining what is best for the client; this is an inherently subjective determination made by the client.”

He argued in his testimony that, “We are not holding the broker to an obligation to find the best available insurance. The brokers duty is to take reasonable steps to determine the clients needs; to use its expertise to find options in the marketplace that meet those needs; to present those options to the client; and to make a recommendation, based on its expertise, of the best available option.”

Garamendi added, “These proposed regulations simply say that in carrying out that duty, the broker may not put its own interests ahead of its clients. No one who is unwilling to accept that obligation should be doing business as a licensed broker in the state of California, and we will do everything necessary to make sure that they are not.”

Reproduced from National Underwriter Edition, November 18, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.