In the last year, the insurance industry has received considerable media attention about producer compensation and, in particular, contingent commissions.  In most states, insurance commissioners, under laws that include surety in their definitions of insurance, regulate the sale of surety bonds, at least for purposes of compensation. Because of the close relationship between insurance and surety, any new laws and regulations addressing the disclosure of compensation will also affect professional surety bond producers.

NASBP wrote this article to assist members in gaining a better understanding of this complex issue.

1.     Q:    What is a “contingent commission?” 

A:    A commission is “contingent” if it is not earned unless certain other events transpire. In the insurance and surety industries the term “contingent commissions” has come to mean after-the-sale compensation based on (1) the profitability of a particular account or book of business with the insurer/surety company, or (2) the volume of business placed with the insurer/surety company by a producing firm.  

2.      Q.    Where did the concerns regarding contingent commissions come from and what are they?

A.    This is not a new issue in the industry, although it has received considerable publicity lately.  Some attorneys general have taken the position that the receipt of compensation based on the volume of business placed with a certain insurance company, for example, gives a producer an incentive to steer customers to that company.  Therefore, they claim, this aspect of the producer’s compensation must be disclosed to the customer.  Class action lawsuits also have been filed against brokers seeking reimbursement of supposed “overcharges” of customers by brokers.

Some industry associations have expressed frustration that the focus of these concerns has been on contingent commissions instead of an exploration of the more fundamental issue of a potential conflict of interest when a producer receives compensation from both the customer and the insurer for the same business transaction.

3.     Q.    Who is setting the standards for what producers have to disclose and to   whom? 

A.    Two organizations have come out with model or suggested legislative language regarding the disclosure of compensation: the National Association of Insurance Commissioners (NAIC) and the National Conference of Insurance Legislators (NCOIL).

NAIC was the first to propose model language to address disclosure of contingent compensation as an amendment to its previously adopted Producer Licensing Model Act (PLMA) of 2000.  It received many comments from the insurance industry through organizations representing both companies and producers. Building upon definitions already contained in the PLMA, the amendment set forth additional definitions relating to compensation.

Adopted on December 29, 2004, the NAIC amendment has been criticized by some as being too broad in that it requires pre-sale disclosure from all producers for all compensation.  It has three distinct characteristics as described below. [The words and terms in italics come from the model amendment and are defined in the answer to question#4 below].

A.       Who?  It requires disclosure by any producer or any “affiliate” who either (1) receives “compensation from the customer” for the placement of insurance or (2) represents customers with respect to that placement.  It also applies to an insurance producer who represents an insurer that has appointed him or her.

B.       What?  It requires disclosure of the amount of “compensation from an insurer or other third party” for any placement of insurance (initial and renewal).  If the amount of contingent compensation is not known at the time of sale, the producer or the can disclose the specific method for calculating the compensation.

C.       How? It requires producers to obtain a signed “documented acknowledgement” from the customer.

On March 1, NCOIL proposed different requirements.  The NCOIL amendment differs from the NAIC amendment in several ways:

A.       Who?  It only requires disclosure by any producer or “affiliate” who receives “compensation from the customer.” It does not contain language that requires disclosure to those whom the producer “represents,” and it exempts from the requirement any “producer whose sole compensation for the placement is derived from commissions, salaries, and other remuneration from the insurer.”

B.       What?  It requires disclosure of the method and factors utilized for calculating the compensation, but only at the time of initial placement.  It does not apply to renewals or require disclosure of the actual amount of compensation.  In addition, either the producer or an affiliate may provide the disclosure.

C.       How?  The NCOIL amendment does not require producers or affiliates to obtain the written acknowledgement of customers.

Either the NAIC amendment or the NCOIL suggested language have been used as the basis for proposed legislation in several states, with some states enacting the legislation into law.  Most of the new state laws either apply only to brokers or follow the NCOIL model that calls for disclosure when a producer is compensated by both a buyer and a company in the same insurance placement. Although no state has adopted the NAIC model in its entirety, several states closely follow the NCOIL model, such as Connecticut, Oregon, Rhode Island, and Texas.   As with anything related to producer licensing, it depends on each individual state.

4.     Q.    What do model amendments mean by ”affiliates,” “compensation,” and other special terms?

A.    These model amendments tend to broadly define terms as indicated in the following:

      “Affiliate” means a person that controls, is controlled by, or is under common control with the producer” (both NAIC and NCOIL).  Receipt by an affiliate of anything considered compensation is the same as receipt by the producer.

“Compensation from an insurer or other third party” means payments, commissions, fees, awards, overrides, bonuses, contingent commissions, loans, stock options, gifts, prizes or any other form of valuable consideration whether or not payable pursuant to a written agreement (both NAIC and NCOIL). Valuable consideration could also mean forgiveness of a debt, for example.

“Compensation from the customer” as defined in both NAIC and NCOIL models, does not include “any fee or similar expense as provided in [insert (state’s) statutory provision(s) or regulation(s)] or any fee or amount collected by or paid to the producer that does not exceed an amount established by the (insurance) commissioner.” “Compensation from the customer” includes anything more than a standard premium at filed rates, such as payment for risk management services. 

 “Documented Acknowledgement” means the customer’s consent obtained prior to the customer’s purchase of insurance. NCOIL does not require “written” consent. NAIC requires the consent to be in writing, but in the case of a purchase over the telephone or by electronic means for which written consent cannot reasonably be obtained, consent documented by the producer shall be acceptable.

“Customer” is defined by NCOIL to mean “the person signing the application or submission for insurance or the authorized representative of the insured actually negotiating the placement of insurance with the producer.” NAIC’s amendment contains no such definition.

5.     Q.    These definitions only refer to a “producer.”  Is that the same as an “agent” or a “broker?”

A.    The NAIC definitions only refer to a “producer” because the PLMA it is amending only defines that term.  The definition in the PLMA reads, “Insurance producer means a person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.”  In most states, the term “producer” includes both agents and brokers; however, this is not always the case. For example, Connecticut’s statute only uses the term “agent” but defines it to be a “producer appointed by an insurer.”  NASBP members need to verify how exactly the states in which they do business and hold resident and non-resident licenses consider their activities.

6.     Q.      Do all states define “compensation” in the same manner as NAIC and NCOIL?

A.     The definition of “compensation” in the NAIC and NCOIL models is pretty broad.  States vary in how specifically they define the term.  Most states are adopting the NAIC definition of compensation (see above) and adding more specific, descriptive language such as, “…not only money, but also anything of value, including trips or prizes that an insurance/surety company awards.”

Nevada is very explicit in defining “compensation.”  Its statute includes participating in advertising expenses or extending credit as “compensation.”  Just because one state’s definition is more vague than another’s is no indication how a court would interpret it.  Therefore, it is very important for producers to understand what is included in each state’s definition of “compensation.”

7.     Q.    The model amendments do not mention a “fiduciary” relationship, but   I’ve seen that term in some state licensure laws.  How does it fit in to the disclosure requirements?

A.    This is where the issue gets sticky. Although “fiduciary” is not mentioned in the   model amendments, it is a legal term and a legal relationship that must be considered in concert with the broader issue of disclosure, and the relationships between a producer and its customer and between a producer and the insurer. The term also appears in the licensing laws of several states.

A “fiduciary” is someone who has a position of trust obligating him or her to put the best interests of another person ahead of his or her own.  Just because a person is appointed an “agent” or “producer,” or “represents” someone else doesn’t necessarily make him or her a fiduciary.

There are a number of ways, however, that a broker or agent can become a fiduciary.  For example, a state statute or regulation could impose a fiduciary duty on a producer, or the producer could agree to act as a fiduciary. Even without an agreement, a producer could later on be found to have led someone to reasonably believe that he or she was acting as fiduciary.  In any of these cases, regardless of whether the producer knowingly or unknowingly acted as a fiduciary, the duty imposed on the producer by a particular state law will be greater than if such a relationship did not exist.

8.     Q.    What kinds of actions by a producer could create a fiduciary duty? 

A.    The fact that a customer is paying a producer a fee for a service may signal to that customer that the producer is representing the customer, or acting on behalf of him or her.  Accepting money for services is not enough, all by itself, to create a fiduciary duty, however.

Courts typically resolve this by asking, “What has the producer agreed to do or led the customer to believe he or she would do?”  The answer to this question will involve a review of the producer’s business practices, its advertising, and its representations to its customers about what it will do for them.  Some examples of “buzz words” that could imply a fiduciary responsibility include:

·         We pursue your interests;

·         We are your advocate;

·         We act on behalf of our clients;

·         We are your assurance of access to surety; or

·         We act as a consultant to your business.”  

9.      Q.      Have any states passed laws or adopted regulations that would interfere with the way my agency does business?

A.    Yes.  Five states, Arkansas, Connecticut, Georgia, Rhode Island, and Texas have passed new disclosure laws.  Washington and Wisconsin already have provisions in their state licensing states, and Nevada and Oregon are dealing with the issue via regulations.  In addition, several other states are considering or have considered such legislation or regulations.

What will be affected is the way an agency discloses information to customers and how such disclosure must be provided.  In terms of compensation, no state is considering legislation that would make it illegal to accept contingent commissions.  Even in states that are proposing new and stricter laws, the requirement being discussed is one of disclosing the compensation to the customer and NOT restricting the compensation.

Although most of the legislation is applicable to both surety and insurance, some bills and/or proposed regulations have contained some problematic provisions – such as requiring a producer to act as a fiduciary for a customer (which may be legally impossible if the producer is already a fiduciary for the company) or requiring the producer to obtain a minimum number of “quotes,” i.e., 6, for the customer, which may not be possible in the surety context.

To see what language some of the states are considering, or have adopted, click here.

10.   Q.    Do producers have to follow the law of the state where they have their “home” office, where they have branch offices, or where they hold non-resident licenses?

A.     Producers have to comply with all of the above, which means complying with the strictest of all rules of any state where the producer does business.

11.   Q.    What should I do if a state in which I do business imposes requirements that don’t make sense or don’t apply to surety? 

A.    It is important for NASBP members to keep up with all the new legislation being considered and enacted, especially those states in which they do business and hold a non-resident producer’s license.  Not everyone understands surety as well as those in the industry do, including state departments of insurance and state legislators.  Please call NASBP to report concerns about specific language under consideration in either legislation or regulations, which may not be relevant to surety, so we can put you in touch with others who are knowledgeable about your state and its particular policymaking procedures.

12.   Q.    What is the future of contingent commissions?

A.    As of the writing of this article, no state has passed any law prohibiting

contingent commissions, nor do the NAIC or NCOIL models propose such action. The push has been for more “transparency” and disclosure.  A few of the largest insurance and surety brokerage firms, however, have publicly stated that they will no longer accept contingent payments from insurers. Others have taken a stance against banishing the practice of continent commissions in favor of complete disclosure to customers.

A different viewpoint was articulated in an article contained in the July 18, 2005 issue of Business Insurance. This article reported that the Risk & Insurance Management Society, Inc. (RIMS) is pursuing a campaign to end contingent commissions, and in their place develop a standard brokerage compensation system.  Some call the idea of an industry-developed standard compensation model as conflicting with federal antitrust laws.

So what is the future of contingent commissions?  Stay tuned—it’s far from settled.

Susan McGreevy, NASBP’s General Council, of Husch & Eppenberger LC, Kansas City, MO, and Connie Lynch, Director, Government Relations, collaborated on this article.  Questions and requests for additional information should be directed to Connie Lynch at clynch@nasbp.org or 202/464-1173.

Disclaimer:  This information is provided for educational and informational purposes only and is not intended to serve as legal advice.  Readers are cautioned to consult their legal counsel and state department of insurance on any specific matters.

Florida:  Although the Legislature failed to pass legislation revising language contained in the state’s bond form for public construction, it did adopt an important bill for surety companies.

Louisiana:  The Legislature of this state decreased the bond requirements for certain projects of two local jurisdictions.

Mississippi: This legislature had a relatively quiet session this year but passed a couple of bills of interest to NASBP members.

Montana:  This was the year of the environment in the “big sky state” where Legislature passed a number of bills concerning reclamation and bonding.  Also adopted were laws concerning retainage, bid bonds, and performance bonds.

Nevada:  This year, Nevada enacted a smorgasbord of bills pertaining to the surety industry.

New Hampshire:  Most notable is that this state has a new law pertaining to design-build and construction management.

North Dakota:  This state is notable for what it didn’t approve this year.

For bond and insurance producers, attending the Conference offers many opportunities to learn more about the industry and to forge new relationships with other construction risk and insurance professionals. Last year, more than 1,200 people filled the roughly 30 workshops presented during this 3½-day program. Of these, roughly 400 are employed by contractors or project owners. Another third are insurance agents and brokers, and the remaining third include insurance underwriters, safety experts, construction attorneys, and consultants.

Nowhere else can you interact with every segment of the construction risk management community. And you will have plenty of chances to do so, including breakfasts, lunches, and cocktail parties, not to mention the scores of entertainment venues Las Vegas boasts. Some producers make a practice of attending with a key contractor client, which is a great way to strengthen your relationship and demonstrate your commitment to staying on top of industry developments.

The silver anniversary Conference, to be held November 7–10 at the MGM Grand Hotel, looks every bit as promising as previous Conferences. The week starts with four intermediate-level “preconference” workshops on diverse topics, including additional insured issues, builders risk claims, construction contracts, and consolidated insurance programs (wrap-ups). Attend any two of these half-day workshops or, if you are new to the industry or need a refresher on the basics, attend the “Introduction to Construction Bonds and Insurance” workshop.

The main part of the Conference starts on Tuesday morning, with keynote speakers Hugh Rice, chairman of FMI Corporation, and Pat Ryan, executive chairman of Aon, who will discuss trends, challenges, and opportunities in the construction and insurance industries. Attendees have the opportunity to attend an additional six workshops of their choice on topics such as contractor default claims, fostering contract surety relationships, construction defects, design-build risks and professional liability insurance, environmental risks and insurance, managing condominium project risks, contract negotiation, umbrella coverage challenges, trends in construction and design liability, estimating project risk and insurance costs, and sustainable construction.

For more information, including descriptions of the workshops and an online registration form, visit www.IRMI.com, or call (800) 827-4242 and ask to be added to our Conference mailing list. (Hint: save $25 by registering online.)

“In my opinion, the knowledge gained through my association with IRMI and the contacts and friends developed networking at the IRMI conferences have aided me more in contributing to the long term profitability of the Klinger Companies than any other organization I have been involved with in my 25 year career as a construction CFO.”

Bob DeSmidt, CFO
Klinger Companies, Inc.
Sioux City, Iowa

“In my opinion, IRMI’s commitment to quality education programs delivered by top notch speakers makes attendance at the Construction Risk Conference a must for anyone involved in the construction risk process.”

James R. Boone,
Risk Manager
Alberici Group, Inc.
St. Louis, MO

The 2005 Revision of the Department of the Treasury’s Listing of Approved Sureties, Circular 570, effective 7/1/05, is now available electronically at:

http://www.fms.treas.gov/c570/.

The Department of the Treasury also reported that the following companies were terminated from the U.S. Department of the Treasury’s 2004 Circular 570, effective 6/30/05. They are not listed on the current 2005 Circular 570.

Atlantic Mutual Insurance Company
Centennial Insurance Company
Gulf Insurance Company
Select Insurance Company

< ANNOUNCEMENT

         · Mullis, Newby, and Hurst LP, in Dallas, Texas, is pleased to announce
the addition of Troy R. Key as Senior Account Executive.

< POSITIONS

· Talbot Agency, Inc., A Hub International Company seeks an aggressive new Surety Account Executive in Albuquerque, NM with strong surety company relationships, who is also willing to assist with existing accounts.  Excellent compensation and benefits provided.

Contact:  Please contact Robyn Schlegel, Human Resources at 505-828-4054 or email employmentrs@talbotcorp.com.

· OHIO CASUALTY INSURANCE COMPANY has an opportunity for a Bond Underwriter/Senior Bond Underwriter in its Orlando, FL office servicing Florida. has an opportunity for a Bond Underwriter/Senior Bond Underwriter in its Orlando, FL office servicing Florida.

Responsibilities:  Exercise underwriting judgment as to the merits of all types of surety and fidelity submissions according to company guidelines and authority including financial analysis and verifications; develop and maintain strong agency and principal relationships; supervision of clerical staff as necessary.

Requirements:  Bachelor’s Degree, at least 3-5 years of progressive surety/fidelity underwriting experience; solid contract bond underwriting experience; strong verbal, written, and interpersonal communication skills.

Contact: Send resume to jobs@ocas.com and indicate posting number #1931.

· MERCHANTS BONDING COMPANY is seeking a Contract Bond Underwriter for both its Austin, Texas branch office and its Des Moines, Iowa corporate office.

Responsibilities:  Individuals will be required to solicit and underwrite contract surety business.  Travel is also required.

Requirements:  Candidates should have experience in the entire contract surety underwriting process including financial analysis and risk assessment.  Experience in working with accounts of all sizes is preferred.  Two to seven years of underwriting is required.

Contact:  Send resume to cbrashear@merchantsbonding.com

· CNA SURETY CORPORATION currently has Underwriting Support opportunities in the following locations:

· Phoenix, AZ – Underwriting Assistant
·  Quincy, MA – Underwriting Assistant (Part-Time)
·  Grand Rapids, MI – Underwriting Assistant         

Responsibilities:  Review bond applications and execute agent requests; process new and renewal business; work with outside clients and home office underwriting personnel; ensure all information, databases and files are organized and updated.

Requirements:  HS diploma or equivalent with 1-3 years in an office environment, strong communication skills, and solid MS Office experience.  Exposure to accounting, financial services or insurance industry preferred.

Contact: Lisa Young, Human Resources Coordinator, via e-mail lisa.young@cnasurety.com, or fax resume to 312-817-1759.  Visit www.cnasurety.com for more company information. EOE

· Safe, Accountable, Flexible, and Efficient Transportation Equity Act—A Legacy for Users (SAFETEA-LU): On July 29, Congress overwhelmingly approved a Conference Committee Compromise that reauthorizes the federal highway and transit programs through FY 2009. The passage of this bill comes after several extensions and both chambers of Congress hammering out an agreement to provide $286.5 billion in guaranteed funding for the federal highway, transit and safety programs. The investment level is $2.5 billion more than the House-passed reauthorization bill and $7.5 billion less than the Senate’s version. It looks like this bill is finally in the clear to become law. The President signed the 1346-page measure into law on August 10, 2005.

· The Terrorism Risk Insurance Act (TRIA): A bill introduced in the Senate (S 467) and in the House (HR 1153) would extend the applicability of the Terrorism Risk Insurance Act of 2002. What may very well be the final nail in the coffin for this legislation in its present form is the Treasury Department’s report to Congress on the Act’s effectiveness and the capacity of the insurance market to provide affordable terrorism coverage if TRIA is allowed to expire as scheduled on December 31, 2005. The Department’s report concludes that there is no need to extend the program. In a letter accompanying the report, however, Treasury Secretary John Snow indicated that the Bush Administration is willing to support an extension of TRIA in a scaled-down form that would reduce the federal backstop for insured terrorism losses. Treasury also wants insurers’ deductibles and co-payments raised. Currently under TRIA, Treasury covers 90% of terrorism losses over a deductible, which this year is 15% of an insurer’s 2004 premiums. It caps combined federal and insurance industry liability at $100 billion a year. More information about TRIA can be found in the April 2005 issue of Pipeline at http://www.nasbp.org/Pipeline_05_05/text.htm.

· The Junk Fax Prevention Act of 2005 (S 714): This bill was signed into law as expected on July 9, 2005. The creation of this legislation was due to the Federal Communications Commission’s (FCC) new rules that would have prohibited commercial faxes sent without a recipient’s written consent. These rules were designed to do for fax recipients what the do-not-call list did for recipients of telemarketing calls. S 714 maintains the “established business relationship” (EBR) exception that allows associations and companies to send unsolicited commercial faxes to their members and clients. Besides restoring the EBR, this bill: (1) requires that all unsolicited commercial faxes include an opt-out provision on the first page of the fax and provide a cost-free 24-hour mechanism for the recipient to request to be removed from the fax distribution list; (2) requires the fax numbers to be obtained either directly from the recipient or from a public source to which the recipient gave the number for publication; and (3) “grandfathers” in fax numbers in the possession of the sender at the time of enactment.

· Optional Federal Charter (OFC): Federal oversight of state insurance regulation received a major boost in support on June 14 when a coalition made up of organizations representing the financial services industries asked Congress to enact federal insurance charter legislation. In its letter, the coalition, also known as the Optional Federal Charter Coalition (OFCC), stated its arguments for reforming claims handling for consumers and providing greater product choice and portability. OFCC trade group members include Agents for Change, the American Bankers Association, the American Council of Life Insurers, the American Insurance Association, the Council of Insurance Agents and Brokers, the Financial Services Forums, and the Financial Services Roundtable.

Currently, reform proposals at the national level are moving in two directions. One is a dual, federal/state chartering system similar to the banking industry’s dual regulatory system that would allow companies to choose between the state system and a national regulatory structure that would eliminate the need to comply with 51 sets of different state regulations. The other is a modernization of the state system. One proposal would create a framework for a national system of state-based regulation, which would create uniform standards for market conduct, licensing, the filing of new products, and reinsurance.

Trade associations that do not support OFC and believe that state regulation is the most desirable means through which to achieve a competitive insurance market include the Independent Insurance Agents & Brokers of America (the Big I), the Property and Casualty Insurers Association of America, the National Association of Health Underwriters, the National Association of Insurance Commissioners (NAIC), the National Conference of Insurance Legislators (NCOIL), the National Association of Mutual Insurance Companies, the National Association of Professional Insurance Agents, and the National Conference of State Legislatures (NCOIL).