United States: Garamendi Writes First Chapter Of A "Long And Sordid Story"
Proposes New Agent/Broker Commission Disclosure Regulations In California

California Insurance Commissioner John Garamendi held a press conference earlier today, primarily to address new regulations his Department is proposing "to protect consumers from undisclosed agent/broker commissions." He also used it as an opportunity to repeatedly reference the fact that although his office "hit a speed bump" last week, it intends to file civil litigation against the insurance industry next week. He characterized this as the opening chapter in what will be a "long and sordid book" for the insurance industry.

On the litigation front, Mr. Garamendi held his cards very tight to his vest, saying only that between his investigation and Eliot Spitzer’s investigation (with which he indicated the California Department of Insurance was cooperating/coordinating), every line of insurance will be impacted. Furthermore, he indicated that his investigation will focus on virtually every player in the insurance industry, from "mom and pop" brokers, to major insurance distributors, to the insurers themselves. Mr. Garamendi also specifically referenced independent agents as encompassing part of the focus of his investigation, and alleged that those agents who represent multiple insurers may be unduly influenced to steer business to insurers paying the highest commissions. Finally, Mr. Garamendi indicated that, unlike Eliot Spitzer’s investigation, no subpoenas have been issued in California. This may have been an attempt to build the suspense as to the exact defendants that will ultimately be targeted by the California Department.s civil litigation.

In addition to the preceding, Mr. Garamendi mentioned that the National Association of Insurance Commissioners held a conference call prior to his press conference. In that call, commissioners from across the country apparently discussed the pursuit of "many paths" as a result of the New York and California investigations. However, Mr. Garamendi did not expand further on where these "many paths" might lead.

As to the primary purpose of the conference call, the new California insurance regulations are expected to be approved and become effective in 90-120 days, and were characterized as clarifying and strengthening existing law. They require both insurance agents¹ and brokers to disclose "all material facts surrounding the broker’s receipt or potential receipt of income from a third party, which derives in whole or in part from a transaction on behalf of the client." Furthermore, a broker must not:

1. Fail to provide a client with the proposal of a best available insurer;
2. Advise a client to select an insurer other than the best available insurer;
3. Advise a client not to select a best available insurer from among multiple insurer suggested to the client; and
4. Fail to take reasonable measures to obtain a quote from an insurer that might be a best available insurer.

Failure to comply with the new regulations could result in fines of up to $10,000 per incident, issuance of a cease and desist order and/or revocation or suspension of a broker’s license.

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