New York’s broker pay disclosure law not retroactive, court says

Insurance brokers don't have to disclose incentive arrangements with insurers that were entered into before New York state's disclosure regulation took effect Jan. 1, the New York Court of Appeals has ruled

Insurance brokers don’t have to disclose incentive arrangements with insurers that were entered into before New York state’s disclosure regulation took effect Jan. 1, the New York Court of Appeals has ruled.

The case was brought by the New York attorney general’s office against Wells Fargo Insurance Services Inc.

The state’s complaint contained four causes of action that alleged that Wells Fargo engaged in “repeated fraudulent or illegal acts” in violation of state law, was unjustly enriched, committed common-law fraud and breached its fiduciary duties.

The court, which is New York’s highest, said in its Feb. 17 ruling in People v. Wells Fargo Insurance Services Inc., et al., that while the complaint relied on various legal theories, “they can all be boiled down to a claim for breach of fiduciary duty.”

The decision noted that the state didn’t allege that Wells Fargo made any “affirmative misrepresentations or that any customer suffered demonstrable harm” from the incentive arrangements.

The state also didn’t allege that any customer was “persuaded to buy inferior, or overpriced, insurance” to help the broker win an incentive, the court ruled.

A lower court dismissed the original complaint, though it said that the state could replead its case.

Instead, the state appealed directly to the state’s highest court.

REJECTED ARGUMENT

The New York high court rejected the argument that Wells Fargo had breached its fiduciary duties. And the court said that the state didn’t allege that “anything Wells Fargo did was contrary to industry custom.”

In fact, the court said, the parties involved “seem to agree that arrangements such as that cited by the state were commonplace and had not generally been disclosed.

“This nondisclosure may be a bad practice,” the court said. “Indeed, it is prohibited by a recently adopted regulation of the Insurance Department, but that regulation did not exist at the time of the conduct at issue here.”

A prospective regulation is a superior way to end a “questionable but common practice than what the attorney general asks us to do here: in substance, to outlaw the practice retroactively by creating a common-law rule,” the court said in upholding the lower court’s dismissal.

“This ruling underscores the need for the recently implemented Insurance Department’s regulation that states these fees be disclosed upon consumer request,” John R. Phelps, secretary and board liaison to the external-affairs committee of the Risk & Insurance Management Society Inc., which wasn’t involved in the case but does advocate full disclosure of broker compensation, wrote in an e-mail.

“RIMS continues to believe that there is an inherent conflict of interest from broker compensation sources other than the insured. At the very least, full compensation disclosure should be made to the consumer prior to placement of coverage,” Mr. Phelps said.

“It maintains the status quo and it gives meaning to the new Insurance Department disclosure regulation, which will now dictate disclosure obligations going forward,” said Scott Sinder, general counsel for the Council of Insurance Agents & Brokers, which filed a brief supporting Wells Fargo.

“What was surprising was that the highest court took the case, because normally, they take the cases to change the law or to make new law,” said Mr. Sinder, who also is chairman of Steptoe & Johnson LLP’s government affairs and public-policy practice. “Here, they ended up saying that the existing law is right.”

Mark A. Hofmann is a senior editor at sister publication Business Insurance.