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May 3, 2010 Subscribe to
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Broker violated law on contingent commissions: Court

 

Mr. Blumenthal

HARTFORD, Conn.—A Connecticut judge has ruled that insurance brokerage Acordia Inc. violated the law when it failed to disclose contingent commissions, a ruling a state official hails as setting precedent on brokers’ fiduciary duties.

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The Connecticut Superior Court on April 21 ruled in favor of the state and Connecticut Attorney General Richard Blumenthal, stating that Acordia, now a unit of insurance brokerage Wells Fargo Insurance Services Inc., had the fiduciary duty to notify its clients that it received contingent commissions in exchange for placing business with “preferred” insurers.

Those preferred insurers included Travelers Cos. Inc., Hartford Financial Services Group Inc., Chubb Group of Insurance Cos., Atlantic Mutual Insurance Co. and RSA Insurance Group P.L.C., authorities said.

The court said Chicago-based WFIS should have disclosed accepting contingent commissions from insurers as those commissions are a conflict of interest.

Connecticut’s case is the first case to go to trial on the issue of whether an insurance broker owes a fiduciary duty to its clients to disclose contingent commissions, Mr. Blumenthal said in a statement.

“This decision confirms our hard-fought position (that) secret agreements and kickbacks are bad for businesses and bad for consumers,” Mr. Blumenthal said in the statement. “There can be no confusion that brokers owe a duty of honesty to their clients. Wells Fargo must now identify and eventually disgorge profits that it illegally earned at the harm of Connecticut businesses and consumers.”

Connecticut is one of several states that have brought cases against insurance brokers over contingent commissions since 2004. Mr. Blumenthal alleged that Acordia took in nearly $200 million in fees between 2000 and 2005 under an agreement it had with insurers.

In January 1999, Acordia initiated the Millennium Agency System Partnership to obtain financial support over a three-year period to offset costs associated with the launch of AMS Segetta, an agency management system to link its offices with its partner insurers on the Web. Mr. Blumenthal alleged that this provided partner insurers an “inside track” for future business with Acordia.

Under the partnership, the insurers were offered various ways to help Acordia meet its financial objectives, including paying a 1% commission, the attorney general said.

The court did not determine a dollar amount to disgorge, but ordered Wells Fargo to identify and disclose how much it earned from contingent commissions. Wells Fargo purchased Acordia in 2001.

Wells Fargo plans to appeal the ruling, a spokeswoman said.

According to a statement from Wells Fargo, the court’s ruling was based on an “incorrect interpretation of the Connecticut Unfair Insurance Practices Act.”

The brokerage added: “The court order specifically states Wells Fargo’s insurance brokers acted in the best interests of their customers, that no customer suffered any financial detriment and that all customer premiums were the same regardless of the contingent commissions….Since 2005, Wells Fargo has voluntarily been disclosing all compensation it receives, including contingent commissions.”


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