Authors: Chris Boggs and Wes Bissett, IIABA Senior Counsel
Eliot Spitzer, former New York Attorney General, sued Marsh & McLennan Cos. on October 14, 2004, for supposed bid rigging and other misdeeds and misinformation. This suit led to laws requiring insurance agents and brokers to disclose who they represent (the carrier or the insured), the sources of income, and sometimes the amount of income. Fifteen states currently have commission disclosure laws on the books possibly as an indirect result of Spitzer's suit.
Recently one of our members asked the VU about the current status of these laws and requested an updated list of states that apply "Commission Disclosure Statement" laws. Wes Bissett, IIABA Senior Counsel provided the member the following information:
Although there are exceptions, very few states require insurance producers to provide information to buyers about the commissions they receive from insurers. Policymakers in most jurisdictions have concluded that forcing agents to make disclosures about the compensation received from insurance companies highlights one small component of a policy's total price and erroneously conveys to the customer that it is the most notable and significant. Customers should be focused on the total policy – its coverages and terms, the price, and the underwriting carrier – and government-mandated disclosures can lead to poor decision-making and consumer confusion.
Some jurisdictions also allow insurance producers to charge fees, either in addition to or in lieu of commissions received from an insurer. The compensation disclosure laws do not address disclosure and other state-specific requirements that apply when producers charge fees.
According to Bissett, most of these requirements do not apply to or affect the typical IIABA agent transaction. For the most part, these laws/regulations are only triggered when an agent is compensated by both an insurer and a client in the same transaction; to health insurance sales; and in other "less-than-common" scenarios.
Anyone with questions or comments about these issues is encouraged to contact Wes Bissett, IIABA Senior Counsel, at firstname.lastname@example.org or by phone at 202-302-1607.
Following are the most current state Commission Disclosure Statement laws.
Commission Disclosure Requirements
In 2005, the State of Arkansas enacted Ark. Code Ann. §23-64-520 and implemented three disclosure requirements:
- Before the placement of insurance business, all insurance producers shall disclose (1) whether the producer or its affiliate represents the customer or the insurer and (2) the source or sources of the producer's or affiliate's compensation for the placement.
- If the producer represents the insurer, the producer shall disclose to the customer that the producer provides services to the customer on behalf of the insurer.
- If the producer receives compensation from the customer for a placement of insurance or acts as a broker as defined by § 23-64-102, the producer shall disclose (1) the source or sources of the producer's or affiliate's compensation for the placement and (2) whether the producer or its affiliate will receive compensation for the placement from the insurer or other third party based upon volume, profitability, or other factors, and if the customer requests, the producer shall provide a reasonable estimate of the amount of compensation.
Although the core provisions have been modified to some extent, the law utilizes the definitions and other technical provisions of the NAIC model. For example, the disclosure requirements are not triggered by certain fees recognized by the insurance code or by fees or expenses that are less than a threshold amount established by the department. In addition to the exemptions included in the NAIC model, the act also exempts placements involving a residual market mechanism, renewals (unless the information previously disclosed has substantially changed), and placements of credit life or credit disability insurance. Finally, the requisite disclosures may be made orally, and no written confirmation is required from the insured. The Arkansas Insurance Department issued Bulletin 5-2005 and additional guidance to help explain these requirements.
In 2008, Colorado enacted health care-related legislation that established certain new compensation disclosure requirements that apply in connection with the sale of health insurance. Specifically, the relevant section (Colo. Rev. Stat. § 10-16-133(5)) provided:
"An insurance producer … who solicits or negotiates an application for health care insurance on behalf of a carrier shall disclose to the person purchasing the plan that the insurance producer will receive a commission from the carrier. The insurance producer shall provide the consumer with the standard compensation schedule for the product being sold. Any change to the insurance producer's compensation from the initial disclosure to the time of purchase shall be disclosed by the insurance producer to the purchaser at or before the time of sale."
In March 2009, the Colorado Division of Insurance promulgated a regulation (Regulation 1-2-17 – Standard Compensation Disclosure for Health Insurance Producers) outlining the parameters of the mandates. The regulation provides the following:
- All producers who sell health care insurance must disclose their standard compensation, either as a percentage or fixed amount (depending upon how the commission is paid).
- Contingent or additional compensation are not subject to the disclosure requirement.
- The disclosures must be made when the producer finalizes the sale of health insurance, but they only apply to the sale of a new policy.
- The producer must maintain written certification that he/she provided the required disclosure (including, but not limited to, proof of mailing or a copy of an email), and this must be maintained for the calendar year in which the policy was sold and two prior years.
Conn. Gen. Stat. § 38a-707a is similar to the NCOIL model proposal and includes some elements of the NAIC's model law. Perhaps most importantly, disclosure is only required when an "insurance producer or affiliate of such producer receives any compensation directly from a customer for the initial placement of insurance" and also "accept[s] or receive[s] any compensation from an insurer or other third party for that placement of insurance." If a producer falls into this category, he/she must comply with certain acknowledgement and disclosure requirements "prior to the time the policy is delivered to the customer." The law also provides express exemptions for "the placement of insurance in surplus lines or residual markets" and any "producer whose sole compensation is derived from commissions or other remuneration from the insurer." Finally, the law clarifies that the "intentional misquot[ing] of a premium rate for the purpose of inducing or tending to induce the purchase" of a policy constitutes a misrepresentation under the state's unfair trade practices act. The law took effect in October 2005.
Ga. Code 33-23-46, which is similar to the NCOIL model law, was signed into law in May 2005. The proposal confirms that only producers licensed as counselors may receive compensation from customers for insurance placements, and it establishes disclosure requirements for any counselor who receives compensation from both a customer and an insurer for the same placement of insurance. In such instances, the producer/counselor must obtain the customer's consent and disclose the amount of compensation (or, if the actual amount is unknown, the method used for calculating the compensation and a reasonable estimate). Among other provisions, the bill also clearly does not apply to renewals and to any transaction in which the producer's sole compensation for a placement is derived from commissions, salaries, and other remuneration from an insurer.
Indiana law (IC 27-1-15.6-22) prohibits an insurance producer from receiving compensation for the sale, solicitation, negotiation, or renewal of any insurance policy issued to any person or entity for whom the insurance producer, for a fee, acts as a consultant for that policy unless:
(1) the producer provides to the insured a written agreement; and
(2) the producer discloses to the insured the following information prior to the sale, solicitation, negotiation, or renewal of any policy:
(A) The fact that the insurance producer will receive compensation for the sale of the policy; and
(B) The method of compensation.
A regulation promulgated by the state in 2005 (NAC 683A.700-718) imposes a series of duties on insurance brokers. These requirements apply to producers who act on behalf of insureds or prospective insureds and are not agents of an insurer. The most notable provisions (which can found in NAC 683A.716) are outlined below:
A broker who represents a client in an insurance transaction:
1. Shall not unreasonably place his or her own interest above the interest of the client.
2. Shall, before or simultaneously with a client's purchase of insurance, or the consummation of any other insurance transaction that would entitle the broker to compensation as a result of his or her representation of the client, disclose to the client:
(a) That the broker may receive compensation in some form from an insurer or other source as a result of his or her representation of the client in the transaction.
(b) The name and identity of the source of the compensation and whether the broker has any ownership interest in, or is under common control with, the person providing the compensation.
(c) That the compensation received by the broker may differ depending upon the product and insurer.
(d) The identity of any other person that the broker knows, or reasonably ought to know, will receive compensation from the insurer for assisting the broker in the insurance transaction. As used in this paragraph, "person" does not include an intermediary, managing general agent or wholesale broker acting in the normal course of production.
These disclosures must be followed by a documented acknowledgment by the client and the broker that clearly indicates the client's understanding of the contents of the disclosure statement before or simultaneously with the consummation of the insurance transaction. In the case of a transaction consummated over the telephone or by electronic means, the client's understanding of the disclosure must be documented by the broker at the time of the transaction and followed by a documented acknowledgment by the client and the broker.
3. Shall, before a client's purchase of insurance, disclose to the client the name of each insurer or other person that supplied the broker with a quote that would reasonably meet the client's needs.
In 2008, New Jersey enacted health care-related legislation that established certain new compensation disclosure requirements that apply in connection with the sale of health insurance policies. Specifically, the relevant section (now codified at N.J. Stat. Ann. § 17:22A-41.1) provides:
"a. An insurance producer … who sells, solicits, or negotiates health insurance policies or contracts to residents of this State shall notify the purchaser of the insurance, in writing, of the amount of any commission, service fee, brokerage, or other valuable consideration that the producer will receive as a result of the sale, solicitation or negotiation of the health insurance policy or contract. If the commission, fee, brokerage, or other valuable consideration is based on a percentage of premium, the insurance producer shall include that information in the notification to the purchaser.
b. The commissioner may specify, by regulation, the information that shall be provided by an insurance producer in the notification to a purchaser of health insurance and the procedure for providing the notification."
In October 2008, the Department of Banking and Insurance issued Bulletin Number 08-16. The bulletin outlined the Department's interpretative guidance on the disclosure mandates, and the relevant sections of the bulletin are copied verbatim below:
Scope of Disclosure: Disclosure is required for any insurance contract that meets the definition of "health insurance" at N.J.S.A. 17B:17-4 and for any contract sold by non-insurance health carriers, such as hospital, medical, health and dental service corporations; dental plan organizations, prepaid prescription plans and health maintenance organizations. Disclosure is not required for health coverage that is an incidental part of a life or annuity contract.
What must be Disclosed: Any valuable consideration, including but not limited to commissions or service fees, must be disclosed. Consideration must be disclosed even if its amount cannot be calculated or estimated. However, the precise nature of the compensation (e.g., commission vs. service fee) does not need to be disclosed. In the case of standard commission rates, the commission percentage or the per employee amount of commission in connection with a rate proposal, binder or bill may be disclosed.
Who Provides Disclosure: The Act requires that the producer provide the disclosure to the insurance purchaser, however in many cases it may be more efficient for the carrier to provide the disclosure.
Timing of Disclosure: The Act does not imply that disclosure must be made at the time of proposal or prior to a contract becoming effective. Disclosure should be made no later than the effective date of the contract.
Form of Disclosure: Attached is a suggested form that may be used for compliance with the Act's compensation disclosure requirements [see link noted above]. Use of an alternate form is acceptable so long as the Act's written compensation disclosure requirements are met.
Regulation 194, promulgated by the New York Insurance Department in 2010, imposes detailed producer compensation disclosure requirements on insurance agents and brokers. The Department has prepared an FAQ, and the Independent Insurance Agents & Brokers of New York has a webpage that provides regulator-approved compliance forms and other helpful information.
The compensation disclosure provisions found at Ohio Rev. Code Ann. § 3905.56 were passed in late 2006 and took effect in March 2007. The law includes elements of both the NAIC and NCOIL model laws, but it only applies to initial placement transactions involving public entities. The law provides the following:
"Where an insurance agent or an affiliate of [the] agent receives any compensation from a public entity related to the placement of insurance, or is entitled to receive such compensation from a public entity even if the agent or affiliate waives receipt or collection of that compensation, neither that agent nor the affiliate shall accept or receive any compensation from an insurer or other third party related to that placement of insurance with the public entity unless the agent or affiliate has, prior to the placement of insurance, obtained the public entity's documented acknowledgement that such third-party compensation will be received by the agent or affiliate."
The law also includes an express exemption for any agent "whose sole compensation related to the placement of insurance with the public entity is compensation from an insurer or other third party." In addition, "public entity" is defined as "the state and any political subdivision as defined in section 2744.01 of the Revised Code; any state institution of higher education as defined in section 3345.12 of the Revised Code; and any instrumentality or retirement system of the state, any political subdivision, or any state institution of higher education."
In May 2005, the Oregon Insurance Division completed its long development of a set of rules that establish disclosure rules for producers who receive compensation from both a customer and an insurer or from a customer alone. Any producer falling into this category would be required to make disclosures similar to those included in the NAIC model act. In essence, the trigger used in the regulations is similar to that included in the NCOIL model law, and the disclosures that must be made mirror those required by the NAIC model law. More information about the rules can be found online.
The State Department of Business Regulation and the Division of Insurance aggressively pursued legislation in this area, and a proposal was passed by the General Assembly and signed into law in June 2005. The law – codified at R.I. Gen. Laws § 27-2.4-15.1 – is nearly identical to the NCOIL model law, with one exception. Following the NCOIL exemption for producers whose sole compensation for a placement is derived from commissions, salaries, and other remuneration from an insurer, the law states the following: "Notwithstanding this provision, a producer shall, at the time of sale or no later than the delivery of the policy, disclose that they will be paid a commission by the company and may receive other performance based compensation. This does not apply to salaried employees of an insurance company."
In early 2006, the Department of Business Regulation issued Insurance Bulletin Number 2006-2. The text has been copied below:
For all insurance policies issued in Rhode Island after January 1, 2006, insurance producers must comply with R.I.G.L. § 27-2.4-15.1. In accordance with this statute notification regarding the producers compensation must be made by the producer with regard to every policy, however, the content of that disclosure depends upon the contractual relationship between the producer and the insured.
Producers whose compensation is limited to commissions paid by the insurer to the producer, must inform insureds that they will be paid a commission by the insurer. If the contract between the insurer and the producer provides for any other potential compensation (i.e. contingent commissions) the producer must also inform the insured that the producer may receive performance based compensation from the insurer in addition the policy commission. The notification to the insured may be made at any time but no later than policy delivery.
Producers who receive compensation from the insured may not accept any form of compensation from the insurer unless the producer provides to the insured a description of the methods and factors utilized for calculating compensation from the insurer or other third party and the producer obtains the insured's documented acknowledgement that such compensation will be received. The notification to the insured may take place at any time during the selling, soliciting or negotiating of the insurance sale as long as the insured receives the information prior to consummation of the transaction. For example, a producer could provide the notification along with the policy illustration.
If a producer is an employee of an insurer and his or her compensation is received solely from that insurer, the producer is not required to make any disclosure regarding compensation.
Producers should use any reasonable method to inform insureds as detailed above. The Department does not require any specific form of transmittal, however, upon inquiry from the Department, producers will be required to document the compensation transmittal. The Department would, therefore suggest that some form of written notification would be the best practice.
The state's producer compensation disclosure requirements (see Texas Ins. Code Ann. § 4005.004) were enacted in 2005 and are nearly identical to the NCOIL model. The law prohibits an agent from receiving compensation for the same placement or renewal of insurance from both a customer and an insurer or other third party, unless the customer provides his/her documented acknowledgement and is provided with a description of the method and factors used to compute the compensation to be received from the insurer or third party. The definition of "documented acknowledgement" is different from that used in the NCOIL model, but the bill does include the NCOIL exemption for any agent whose sole compensation for a placement or servicing of a product is derived from compensation paid only by the insurer.
Utah law imposes certain compensation disclosure requirements in connection with the placement of health benefit plans. Specifically, Section 31A-23a-501(4) provides the following:
(a) For purposes of this Subsection (4):
(i) "Large customer" means an employer who, with respect to a calendar year and to a plan year:
(A) employed an average of at least 100 eligible employees on each business day during the preceding calendar year; and
(B) employs at least two employees on the first day of the plan year.
(ii) "Producer" includes:
(A) a producer;
(B) an affiliate of a producer; or
(C) a consultant.
(b) A producer may not accept or receive any compensation from an insurer or third party administrator for the initial placement of a health benefit plan, other than a hospital confinement indemnity policy, unless prior to a large customer's initial purchase of the health benefit plan the producer discloses in writing to the large customer that the producer will receive compensation from the insurer or third party administrator for the placement of insurance, including the amount or type of compensation known to the producer at the time of the disclosure.
(c) A producer shall:
(i) obtain the large customer's signed acknowledgment that the disclosure under Subsection (4) (b) was made to the large customer; or
(A) sign a statement that the disclosure required by Subsection (4)(b) was made to the large customer; and
(B) keep the signed statement on file in the producer's office while the health benefit plan placed with the large customer is in force.
(d) A licensee who collects or receives any part of the compensation from an insurer or third party administrator in a manner that facilitates an audit shall, while the health benefit plan placed with the large customer is in force, maintain a copy of:
(i) the signed acknowledgment described in Subsection (4)(c)(i); or
(ii) the signed statement described in Subsection (4)(c)(ii).
(e) Subsection (4)(c) does not apply to:
(i) a person licensed as a producer who acts only as an intermediary between an insurer and the customer's producer, including a managing general agent; or
(ii) the placement of insurance in a secondary or residual market.
(i) A producer shall provide to a large customer listed in this Subsection (4)(f) an annual accounting, as defined by rule made by the department in accordance with Title 63G, Chapter 3, Utah Administrative Rulemaking Act, of all amounts the producer receives in commission compensation from an insurer or third party administrator as a result of the sale or placement of a health benefit plan to a large customer that is:
(A) the state;
(B) a political subdivision or instrumentality of the state or a combination thereof primarily engaged in educational activities or the administration or servicing of educational activities, including the State Board of Education and its instrumentalities, an institution of higher education and its branches, a school district and its instrumentalities, a vocational and technical school, and an entity arising out of a consolidation agreement between entities described under this Subsection (4)(f)(i)(B)
(C) a county, city, town, local district under Title 17B, Limited Purpose Local Government Entities - Local Districts, special service district under Title 17D, Chapter 1, Special Service District Act, an entity created by an interlocal cooperation agreement under Title 11, Chapter 13, Interlocal Cooperation Act, or any other governmental entity designated in statute as a political subdivision of the state; or
(D) a quasi-public corporation, that has the same meaning as defined in Section 63E-1-102.
(ii) The department shall pattern the annual accounting required by this Subsection (4)(f) on the insurance related information on Internal Revenue Service Form 5500 and its relevant attachments.
(g) At the request of the department, a producer shall provide the department a copy of:
(i) a disclosure required by this Subsection (4); or
(ii) an Internal Revenue Service Form 5500 and its relevant attachments.
RCW 48.17.270 imposes compensation disclosure requirements in instances when the compensation received by the producer includes a fee. Specifically, the producer must disclose the following:
- The full amount of the fee paid by the insured;
- The full amount of any commission paid to the insurance producer by the insurer, if one is received;
- An explanation of any offset or reimbursement of fees or commissions; and
- The full name of the insurer that may pay any commission to the insurance producer.
If the producer "may receive additional commission," then the producer must also disclose that the producer:
- May receive additional commission in the form of future incentive compensation from the insurer, including contingent commissions and other awards and bonuses based on factors that typically include the total sales volume, growth, profitability, and retention of business placed by the insurance producer with the insurer, and incentive compensation is only paid if the performance criteria established in the agency-insurer agreement is met by the insurance producer or the business entity with which the insurance producer is affiliated; and
- Will furnish to the insured or prospective insured specific information relating to additional commission upon request; and
The disclosure must be provided by the producer to the insured in writing prior to the sale of the policy, and it must be signed by both the insured and producer and retained for five years. In the case of a purchase over the telephone or by electronic means for which written consent cannot be reasonably obtained, consent documented by the insurance producer shall be acceptable, but the producer must then send written confirmation of the disclosure not later than 10 days after the purchase.
The Office of Insurance Commissioner has developed an online FAQ and a form that may (but is not required) to be used for purposes of making the required disclosures.
State law (§628.32) provides the following:
An intermediary may not accept compensation from an insured or from both an insured and another source due to the insured's purchase of insurance or for advice regarding the insured's insurance needs or coverage unless the intermediary, before the insured incurs an obligation to pay compensation, clearly and conspicuously and in writing discloses to the insured all of the following:
(a) The amount of compensation to be paid by the insured, excluding commissions paid by the insurer to the intermediary.
(b) If compensation will be paid by another source, the fact that the intermediary will also receive compensation from the other source.
Last Updated: March 3, 2017