Contingent Commissions Legal, N.Y. Court Rules

In a twist to a scandal that has rocked the insurance industry in the past several years, a New York appeals court recently ruled that contingent commissions paid out by Boston-based Liberty Mutual Group Inc. are not illegal.

The ruling stems from a pending 2006 lawsuit against Liberty Mutual brought by former New York Attorney General Eliot Spitzer that alleged, among other things, that Liberty Mutual and a number of other major brokers and insurers engaged in a far-reaching, industry-wide scheme to defraud clients by steering insurance business to certain carriers in exchange for contingent commissions.

Other carriers, including The Hartford, Chubb and St. Paul Travelers, halted the practice of paying contingent commissions as a result of similar Spitzer-era lawsuits. Unlike its competitors, however, Liberty Mutual has pledged to fight the allegations about its business practices.

The company views the ruling as a small victory. “We’re pleased but unsurprised by the decision,” a company spokesman said.

However, the decision, which overturned part of ruling by a trial court in 2007, also clears the way for current Attorney General Andrew Cuomo to continue a suit against Liberty Mutual for bid-rigging.

Cuomo’s office did not respond to a request to comment on the case.

The court decision earned praise for the company from the Independent Insurance Agents and Brokers of New York, which said, in a statement, “The agent and broker community owes a debt of gratitude to Liberty Mutual for its conviction in the face of so many other major carriers who chose to settle without a fight and now can no longer pay contingent commissions.”

Patricia A. Borowski, senior vice president of the National Association of Professional Insurance Agents, said, “We hope that the certainty of this ruling as it regards contingent compensation serves to deter ambitious state officials from targeting the compensation of those who never engaged in any alleged wrongdoing, such as Main Street independent insurance agents.

“It is time for state attorneys general to revisit settlement agreements that impose these adverse effects indiscriminately on all producers, specifically those who never had anything to do with alleged wrongdoing, and give them back their rightful earnings,” Borowski added.