November Sample Letter to Clients on Disclosure of Compensation - PDF by WesleyL

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									November 22, 2004

Sample Letter to Clients on Disclosure of Compensation

PLEASE NOTE: This sample letter is for members of IBA West who plan to send a letter to their
clients about the much-publicized investigations into broker contingent commission practices.
THIS SAMPLE LETTER IS NOT INTENDED AS LEGAL ADVICE. It should be considered as a
starting point—not the finish line—for client disclosure.

Please read the letter very carefully. If you decide to use this sample, be sure to fill in the blanks
where personalization is required. Even more importantly, be certain that you are prepared to
assume all of the duties that this letter promises you will do. Failure to keep these promises could
subject you to liability, so please read the letter carefully and edit it as you deem appropriate for
your firm’s practices. Feel free to consult with legal counsel or other advisors before sending it
out.

Should California Department of Insurance’s final regulations require actual disclosure, we will
draft model language for brokers and agents to use; until those rules are adopted, this letter is
intended solely as a sample briefing for your clients on your firm’s position regarding the issues
in the press.

THIS SAMPLE LETTER IS NOT INTENDED TO IMPLY THAT PRODUCERS MUST
MAKE THE DISCLOSURES CONTAINED HEREIN TO AVOID LIABILITY, OR THAT
FAILING TO MAKE SUCH DISCLOSURES WOULD VIOLATE ANY EXISTING LEGAL
DUTY TO CLIENTS.

[ Date ]

Dear Client:
As you may have seen in the press, the Attorney General of New York has filed a lawsuit against
Marsh & McLennan, the nation’s largest insurance broker, alleging undisclosed “kickbacks” for
improperly steering business to certain insurers and arranging phony bids in order to dupe
customers into selecting the “chosen” insurers. Underlying this lawsuit is the allegation that
Marsh violated its duty to act in the best interest of its customers.

The investigation in New York is continuing, and other insurance brokers and insurers may be
accused of illegal or unethical behavior. At this point, we do not know whether any of these
allegations are true. However, if true, such behavior is indefensible.

Separate investigations are being conducted in California by our Attorney General and
Insurance Commissioner. While no one knows precisely what those investigations will uncover,
we do not anticipate that this will be shown to be an industrywide problem.
Most insurance agents and brokers put their customers’ interest first and do not engage in
unethical or illegal acts. This is absolutely the case for [ name of agency or brokerage ].

Our firm’s most important asset is our reputation. Our relationship with our clients – with you – is
built on trust. When we represent your interests, we make every reasonable effort to ensure that
the insurance needs you communicate to us are met by an insurer that is appropriate to meet those
needs. We never put our own financial interest ahead of yours.
In short, we treat you as we would want to be treated ourselves.

We want you to know the following about our commitment to serving you:



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1. If we put your insurance out to bid, every insurer that you and we mutually agree to ask to
quote for your business will be expected to submit a competitive bid.

2. The final selection of insurers will be yours. If we make recommendations to you, they will be
based on what we believe is best for you, not us. Our counsel will be based on our evaluation of
the financial security, coverage, service, price, and any other factor that you tell us is important,
of the insurance companies that we can access as your broker.

3. We will tell you in advance whether we do business with particular insurers as their agent, or
whether we deal with them as your broker. If we are acting as your broker, we will disclose all
compensation we expect to receive from the insurer (or any other third party) for the placement of
your insurance. If we are acting as the insurer’s agent, our compensation is set by the insurer; and
you will not pay extra for our services, unless you wish to retain us to perform additional services
unrelated to the placement of the policy.

4. We will fully disclose all fees we propose, in advance, in writing. In most cases when we
charge a fee for our services, we receive no other compensation for the placement of your
insurance. If we do, we will let you know.

5. Many insurance companies with whom we do business have written incentive compensation or
profitsharing agreements with us. These are not, as has been alleged, “hidden” agreements or
“kickbacks.” They allow us to earn potential additional revenue based on our overall business
with an insurer; in that regard, they are exactly like sales incentives paid in a majority of
industries. We do not know whether we will qualify for such incentive plans, or what amount (if
any) we might receive, until long after the policies we place are sold.

6. If we are acting as your broker, we will tell you about any incentives that are in place with the
insurer(s) you select. The cost of your coverage does not increase if we earn an incentive with the
insurer. If incentive compensation is prohibited in the future, we would likely have to increase
our base commission or fees, or reduce the level of service required to properly meet our clients’
needs.

7. We commit to you that we will never recommend a policy with any insurer that offers us
potential additional incentive compensation unless we believe that policy is in your best interest.

To put these incentive plans in perspective, [name of agency or brokerage] sells and services
approximately [amount] in annual premiums and receives, on average, about [percentage] % of
that amount from all such agreements we have with insurers.

We very much value the relationship that we have with you and appreciate the trust you’ve placed
in us to serve your insurance needs. We intend to earn that trust.

If you have any questions after seeing reports in the media regarding these allegations, or would
like to tell us how you feel about the commitments our firm makes to you, please give us a call.
We would be pleased to have the opportunity to discuss it with you.

Sincerely,
[name of agency or brokerage principal]
[title]




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