Rebating Laws Should Not Apply to Broker Fee Agreements
A negotiated retail broker agreement is a contract between a retail producer and an insuranace buyer whereby the parties agree to a total package of services for a fee that takes account of the broker’s commission compensation for procuring insurance — as well as for other “value-added” services that may extend beyond the specified terms of the various insurance policies.
Broker fee agreements are negotiated at arm’s length between the broker and client.
Unlawful rebating is solely in the eyes of the state insurance regulator. There is no clear definition that makes any sense in the context of today’s insurance markets.
Moreover, there is no public policy or legitimate regulatory reason to scrutinize commercial broker fee agreements through the lens of state rebating laws.
Most states deal with rebating as an unfair business practice largely modeled on the National Association of Insurance Commissioners Model Unfair Trade Practices Act. Section H provides in relevant part:
Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any life insurance policy or annuity, or accident and health insurance or other insurance, or agreement as to such contract other than as plainly expressed in the policy issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as an inducement to such policy, any rebate of premiums payable on the policy … or other benefits thereon, of any valuable consideration or inducement whatever not specified in the policy …or anything of value whatsoever not specified in the policy. (See, Why Regulators Should Dump Anti-Rebating Laws, Insurance Journal, Sept. 18, 2017).
None of the historic justifications for anti-rebating laws have any applicability in today’s insurance markets. Not to mention that many state rebating laws seem primarily concerned with how many broker-monogrammed pens the broker may give out without those “gifts” being an “unlawful inducement.”
Commercial clients seek to control costs through one-stop shopping for their insurance needs through a negotiated fee agreement with the broker. They want the broker to apply its knowledge and expertise to negotiate with insurers. They also want a bundle of other professional services beyond insurance placement called “value-added” services, all included for a negotiated fee.
Value-added services may include loss control, risk management, claims management, and other possible services.
Broker fee agreements, like any professional services contract, are subject to renegotiation if the client’s needs change.
It goes without saying that the retail insurance broker must make full disclosure of its commission compensation for procurement of insurance and its charges for “value-added” services.
With full disclosure, broker fee agreements resolve the realistic economic interplays between the client’s needs and those of the broker. Neither party wishes to earn too little or pay too much.
Retail producers generate the business that drives the wholesale markets, including surplus lines. Negotiated fee agreements therefore ripple up the distribution chain and put pressure on everyone to contain costs. That is all to the insurance buyer’s benefit.
It is far from clear what state rebating laws accomplish under any circumstances. It is, however, clear that arm’s length negotiated commercial broker fee agreements offer no grist for the rebating mill.
Does providing more cost-effective professional broker services to a client constitute illegal rebating? And how could a regulator possibly quantify the amount of the purported cost control rebate?
Regulators should strike broker fee agreements off the anti-rebating list.