by John Darer CLU ChFC MSSC RSP
Sally Roberts reported in the August 4, 2008 issue of Business Insurance on the recent producer compensation hearings that have been taking place in New York. According to Roberts, the New York State Insurance Law anti-rebating statute "had a supporting role in the discussions and could ultimately play a part in any future regulatory outcome.
Insurance anti rebating laws are based on the general premise that allowing inducements or rebating of commissions to insureds or prospective insureds can cause an unfair competition between agents and agencies of differing financial size resulting in a possible reduction in competition and opportunity for entry into a market even though the agents are marketing the same or similar products.The public is better served when competition is healthy and agents or agencies differentiate themselves based upon the quality and efficiency of service provided by the agent and a comparison of the benefits provided by the insurance policy rather than upon how much of the agent's commission will be returned to the purchaser.
One reason to take this seriously is that the first deputy superintendent of insurance in New York, Kermitt Brooks is quoted by Roberts as saying that he does not want the state's anti-rebate statute to be "used as a shield" by producers to preclude serious consideration about whether broker compensation should be disclosed to clients. More telling is the quote "If you ask yourself the question am I going to give the consumer information about broker compensation, the next logical question is what can she do with that information legally. And that gets you to the anti-rebate statute".
On the table in New York is whether or not the anti-rebating statute needs to be amended, changed or repealed in conjunction with the enforcement of new compensation disclosure regulations.
Structured settlement stakeholders need to watch these New York state developments very closely.
Dealing first with disclosure, the New York State General Obligations Law 5-1702 mandates a series requirements to be delivered by the defendant (or defendant's legal representative) concurrent with the creation of a structured settlement. In addition, there are certain courts, such as Bronx County, which have local rules of disclosure. Then there are a number of structured settlement consultant firms such as 4structures.com, LLC, Creative Capital, Inc. and EPS Settlements Group, which use a form of structured settlement affidavit or declaration to provide or supplement the state mandated disclosure.
I am fully in favor of full and complete disclosure of any compensation taken by a settlement consultant for counseling, advising or implementing a structured settlement factoring transaction or for receiving referral fees from a company or individual who performs such services.
Moving on to the rebating discussion, IF the rebating laws are repealed, who gets the rebate? Consider these points for discussion:
- While the plaintiff or annuitant may be perceived to be a consumer, he or she is not providing, and CANNOT provide the funds to purchase the structured settlement annuity. If they did attempt to do so then actual receipt would have already occurred and therefore no structured settlement is possible.
- If the plaintiff's financial adviser recommends a 468B qualified settlement fund as a work around, this does not solve the problem in the majority of cases which involve single claimants. This is because the QSF severely limits market choices, there has been no final ruling from Treasury, and/or where the small size of the case makes for an unpleasant cost/benefit ratio.
- If the property and casualty company or defendant gets a generous rebate on what are already thin margins then it is likely that the there will be little financial incentive for plaintiff advisers to do their business and tort victims will suffer as a result. It is also unlikely that a repeal would mean that the current system of commission sharing between brokers and settlement planners for plaintiff and defense (like real estate model) would survive.
- Casualty companies with structured settlement programs may not be able to achieve their goals. Many consultants on their panels,as well as those running them, will attest to the value of having a counterpart on the complex cases. Moreover, if as a result every significant case goes to a qualified settlement fund how is that helping your program?
- Would there be litigation over the rebate? What are the costs? Who suffers the most? I think ALL stakeholders
- If repealed, the New York State Trial Lawyer Association (NYSTLA) and The New York State Academy of Trial Lawyers could lose significant donations. Large contributions from "plaintiff exclusive" settlement companies to the NYSTLA Partnership For Justice and the Academy equivalent would undoubtedly be affected by decreased profitability on New York State business.
- If it happens in New York, does anyone believe it won't happen elsewhere?
There is no easy answer.
Members of The National Structured Settlement Trade Association, Society of Settlement Planners, New York State Trial Lawyer Association (NYSTLA) and The New York State Academy of Trial Lawyers and advocacy groups for the disabled such as AAPD and the Brain Injury Association of New York State must sit up NOW and take notice of the issues and the potential consequences to their constituents.