In October 2004, then-New York Attorney General Eliot Spitzer dramatically announced charges against insurance broker Marsh & McLennan, claiming that Marsh’s receipt of contingent commissions from commercial insurers suppressed competition and led to bid-rigging and other abuses. While the resulting class actions against Marsh and various insurers were finally settled in March 2012, a recent decision shows that basic questions about brokers’ incentive payments remain unresolved.
New York law permits insurers to pay fees that take account of the volume a broker generates. Moreover, New York’s highest court held, in Cuomo v. Wells Fargo Insurance Services, that a broker owes no common law duty to its clients to disclose such incentive payments. (A new regulation that requires disclosure of factors that may affect a broker’s compensation was upheld by a lower court in March 2012.) On the other hand, in State v. Acordia, Inc., a lower court in Connecticut reached the opposite conclusion in 2010: It held that a broker’s failure to disclose contingent commissions constituted a breach of fiduciary duty.
These decisions turned on whether a broker is an agent of the insured, as Acordia held, or if it has “dual agency status,” because its fees are typically paid by insurers.The latter view prevailed in Cuomo, and it was recently adopted by Missouri’s Supreme Court, in Emerson Electric Co. v. Marsh & McLennan Companies. Emerson observed that commissions in general need not be disclosed, and it rejected an argument that contingent commissions should be treated differently, because they allegedly create a heightened danger of conflict of interest.
Nevertheless, the court also held that the question of whether Marsh had breached a duty to its customer could not be resolved from the face of the pleadings: If the customer could show that Marsh failed to advise it of lower-cost insurance available from companies that did not pay such commissions—in other words, if Marsh actually harmed its customer because of the incentives that contingent commissions create—then Marsh would be liable. Contingent commissions are lawful per se, but they can still contribute to significant exposure.