CHAPTER ONE

• INTRODUCTION

1.1 BACKGROUND STUDY

The Association of American Law Schools Insurance Law

Section’s 2008 meeting was devoted to an examination of insurance intermediaries. Intermediaries play a critical middleman role in the distribution and operations of insurance. Besides bringing insureds and insurers together, intermediaries also provide advice to insureds, gather underwriting information for insurers, and generally help facilitate the relationship between insured and insurers all the way through the claims process. Despite the critical importance of intermediaries, judicial decisions considering the duties, obligations, and loyalties of intermediaries have left the law muddied and insureds largely unprotected.

In 2004, the New York Attorney General launched an investigation into whether the common compensation schemes offered to insurance intermediaries by insurers had induced intermediaries to improperly steer their clients’ insurance business to those insurers paying the most lucrative commissions, without regard to their client’s interests. New York’s investigation raised the question of whether the longstanding practice of paying brokers contingent commissions undermined broker loyalty and tainted the broker-insured relationship. The investigation and its aftermath revealed the vulnerabilities of insureds to the undisclosed practices of insurers and intermediaries. Impoverished case law on the loyalties and duties owed by intermediaries to insureds, together with ignorance about the conflicts raised by compensation and contingent commissions likely exacerbated the problem. Thus, the time to look more closely at intermediaries was long overdue.

For most economic goods and services, the seller is primarily interested in whether the buyer is willing to pay the price being asked for the product. By contrast, for many types of insurance coverage, the seller (insurer) also cares about the risk characteristics of the buyer/potential policyholder itself. In fact, the seller must understand what the buyer represents in terms of risk expo- sure in order to determine what the price of the coverage will be.

Many types of insurance are complex, especially those created for individuals or businesses that have substantial, varied, and highly specific needs for risk coverage. Unlike policies whose terms are fairly standard (e.g., personal auto insurance), these commercial insurance products are not commoditized, but must be tailor-made for each policyholder.

While all economic markets need information to operate, the market for these complex products in particular depends on the efficient flow of accurate information.

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