In what I considered a surprise move, Illinois Attorney General Lisa Madigan provided a green light to resume collecting “contingent commissions” to Arthur Gallagher & Company.  Considered to be the fourth largest broker they are headquartered in Illinois and regulated by the state of Illinois. It’s surprising as they along with Marsh and McLennan, and AON had agreed to a settlement several years ago brought about when former NY State Attorney General Eliot Spitzer forced the major insurance brokers to stop this practice.

In case you are not familiar with contingent commissions, these are commissions paid by insurance companies to the insurance broker to push their products to companies, and in many cases the company is paying the insurance broker to negotiate and secure insurance coverage.

I should point out that the agreement between Spitzer and some insurance brokers did not put a halt to contingent commissions.  Many smaller insurance brokers continued to collect these types of commission either as a contingent or a “supplemental” commission.  

As a buyer of insurance programs it is important to understand your relationship with your insurance broker or agent as well as the their relationship with the insurance company.  Is your agreement with them fee based, where you are providing a payment to them for the services they are providing?  Or, is the agreement based on a commission they are receiving from the insurance company for the policy?  Or, is it a combination of the two, where there are some payments provided by you and some commission provided by the carrier.  This should be spelled out in your agreement with the broker, or outlined in the proposal itself. 

Review and understand the proposal that is presented to you at the time of renewal.  Make sure there is a disclosure statement included by your broker which indicates if they are receiving a commission for the placement of the insurance and if they are participating in a contingent or supplemental commission program with the carrier.  If there is no clear documentation, ask your sales rep.

It is important to clearly define your relationship with your insurance broker or agent.  It is also important to understand the breakdown in the cost of the program, if commission is added to the premium, or if there is a portion of the premium dollars that is being earmarked for commission. 

The fact that a contingent commission is associated with an insurance policy should not be a deal breaker, each organization must review the policy and determine if the coverage, and service meet their requirements.  Understanding what makes up the costs help to make an informed decision.

For additional information and another thought on the contingent commission, please review the BNet posting discussing this and the potential pitfalls by Ed Leefeldt.   His posting is a great perspective on the situation.