That was until two months ago, when the Washington Legal Foundation sent a letter to the attorneys general and insurance commissioners in New York and California asking for an investigation of the practice, which, the group contends, “compromises a broker's duty to the client's best interest by encouraging brokers to refer business only to companies that pay them handsome contingency fees.”

The Washington, D.C.-based association, according to its Web site (www.wlf.org), is a 27-year-old, nonprofit organization comprised of lawyers, judges and academics dedicated to “shaping public policy and fighting activist lawyers, regulators, and intrusive government agencies at the federal and state levels, in courts and regulatory agencies across the country.” The group also works to promote free enterprise.

The letter may have spurred other investigations. During an analyst's conference call on April 28, J. Patrick Gallagher Jr., president and chief executive officer of Arthur J. Gallagher, revealed that the New York Insurance Department requested information on contingency fees in March, and that the firm complied.

California Insurance Commissioner John Garamendi, in a letter to WLF, said he would conduct an investigation.

Speculation is that Mr. Spitzers investigation is not just limited to the four public brokerages but also involves other intermediaries and possibly some insurers, although no one has confirmed that.

While the brokerages targeted and the New York AG's office would not comment further on the matter, analysts and association representatives were quick to give their opinions.

The Council of Insurance Agents & Brokers in Washington said contingency fees “are not an issue of concern in the industry.” CIAB said the group and its members have promoted disclosure for the past six years, adding that it is standard procedure to disclose such fees. CIAB added that it was not aware of any customer complaints on the issue and that carrier payments are not made for specific accounts but for the firm's overall business with the carrier. (For buyer reaction, see accompanying story.)

Robert A. Rusbuldt, chief executive officer for the Independent Insurance Agents & Brokers of America in Alexandria, Va., argued that risk managers are sophisticated buyers who understand how the system works. Buyers are well aware of these payment arrangements and realize that brokers put their clients' best interest first, he said.

Richard Poppa, president and chief executive officer of the Independent Insurance Agents & Brokers of New York, said he had “never heard of any instances where clients are being steered to their detriment because of the contingency fee arrangement.”

Generally, analysts did not seem to be overly concerned with the issue, at least for the moment. JP Morgan and Morgan Stanley both released reports saying there appeared to be no illegality in the fees, and if brokers were forced to abandon the practice, they would be able to make up the revenue elsewhere.

Ferris, Baker Watts Inc., in Baltimore, and Credit Suisse First Boston, in New York, voiced the same opinion, adding that they did not feel the outcome of the investigation would change the way business is done. “We believe the outcome of the investigation is unlikely to change total broker compensation, although it may change the way they disclose it,” said Ferris, Baker Watts.

Credit Suisse did note concern that any investigation could uncover other issues, although the firm did not speculate what they could be.

However, a report from Advisen was not so optimistic. David K. Bradford, executive vice president for the consulting firm which works with RIMS on its “Benchmark Survey” wrote that should the investigation find some harm to clients, it could prompt “a stampede to the courthouse” by plaintiff attorneys filing security class-action suits and other private litigation against brokers. The allegation would be that clients overpaid for insurance because of the arrangements, or somehow there were other damages to small brokers, carriers or investors.

“Even if no legal remedies are pursued, brokers are facing an uncomfortable period of disclosure about a practice that may rile important customers,” said Advisen.

Reproduced from National Underwriter Edition, April 30, 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.