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Whatever general counsel may think of New York Attorney General Eliot Spitzer or the politics of his investigations into the insurance industry, it is clear that his mission, regardless of how the investigations are ultimately resolved, will have a long-term impact on how corporations purchase insurance and, very likely, the cost of that insurance. While insurance companies and brokers may be the direct focus of Spitzer and his counterparts in numerous other states, the effects of these investigations will cut through all facets of the business community to reach the corporate insurance-buying public and those doing business with insured corporations. The mere fact of the investigations — again, regardless of their ultimate resolution — will change the way business insurance is purchased. Even though we do not know precisely how these changes will manifest, all parties to the insurance relationship — the insurer, the insured and the broker — will have at least some role in defining responsive going-forward processes and strategies. We do know that investigations targeting potential insurer financial stability, alleged broker contingent commissions and alleged bid rigging are already serving as catalysts for change. By focusing on these issues, general counsel to corporate insureds can begin shaping their clients’ participation in the response to the outcome of Spitzer’s inquiries — whatever it may be. The financial integrity of some of the nation’s largest insurance companies is under the microscope by virtue of investigations into an insurance risk transfer practice known as “finite reinsurance.” At least one insurer has been accused of misusing finite reinsurance transactions to improve its financial statements. The challenges behind finite reinsurance go to the financial integrity of the affected insurance companies. If certain companies are not as financially stable as their publicly-announced documents reflect, it could be that more insurance companies will go into liquidation or, more probably, that the affected insurance companies will have to increase premiums to make up the difference to shore up their balance sheets. While the liquidation scenario seems unlikely, if it were to happen it might leave certain claims uncovered — or only partially covered to the extent that state guaranty funds generally have maximum caps. This could increase the risks of uninsured exposure (an exposure which had been thought to be insured) to corporate insureds. The liquidation scenario might also reduce competition, which in theory could result in higher rates from the remaining carriers. Whatever else comes out of Spitzer’s investigations, the issue of insurer financial integrity is now on the table. Corporate insureds are on notice in terms of the alleged improprieties. Insurers need to restore customer confidence in their financial stability. Regardless of whose fault this is, corporate insureds may now decide to incur the time and expense of due diligence on the financials of their proposed insurers. Corporate insureds can start right away by improving their literacy about the business side of the insurance industry and by monitoring their insurers’ financial status on a scheduled basis. Insured/broker and broker/insurer relationships will inevitably change in the wake of legal and investigatory actions regarding commissions accepted by brokerages for the placement of insurance with certain insurers. Attorney General Spitzer and others have challenged the practice of an insurer paying an additional commission — beyond that disclosed in the proposal or on the policy — to the broker who brings a high volume or particular type of insurance business to the insurer. The allegations assert that different commission schedules are offered depending on the amount and type of business placed or renewed by a particular broker. As general counsel, you can take steps now to help protect your company and ensure that these practices — if they are really happening in the placement of insurance involving your company — do not end up costing your company money: � Ask your broker to identify the insurers with whom it does business. � Ask your broker if the commissions received vary from insurer to insurer. � Ask your broker if the commissions received vary based on the amount or line of business placed with a particular insurer. � Depending on the size of your company and the relationship you have with your broker, consider shopping your business with various brokers — or placing your insurance program out for an RFP — to obtain pricing comparisons, perhaps even from the same insurer. Of course, you may be very satisfied with your current insurance placements. You may be willing to pay higher premiums for what you perceive to be a better insurance product or superior service from the insurer. The longevity of your relationship with your insurer may be more important to you than the cost of the insurance. It may not bother you at all that your broker is earning contingent commissions beyond what is disclosed to you. You may think that the fact that your broker has a particularly close relationship with one or more insurers — even if reflected in additional commission to that broker — is a positive for you, as it may be easier for that broker to make contact on your behalf with the insurers should you need help in the future. Regardless of your conclusions, these still may be good questions to ask when conducting your due diligence on your company’s insurance program. Another area being investigated by Spitzer and others are circumstances where bids for insurance were allegedly being falsified so that a corporate insured would choose a particular carrier presented by the broker. To the extent this practice ever existed, presumably it has now stopped. To protect their companies, however, general counsel may wish to ask the broker for competitive quotes from other insurers and/or may want to shop the business with several insurers. In light of the focus by Spitzer and his colleagues on integrity by insurers in posting their true financial picture and integrity by brokers in obtaining quotes for insurance and offering transparency on the commissions they receive, it should not be unexpected that greater emphasis will be placed on the integrity of the insured, the third prong of the insurance relationship. It behooves any applicant for insurance to be totally forthright in the application process. With the climate now changing in favor of closer scrutiny, there is no reason to suspect that insureds’ disclosures and representations will be left out of the analysis. As general counsel, you will want to do whatever you can to ensure that your company is not the focus of a rescission position or the denial of a claim as a result of some lack of forthrightness in its dealings with its broker and insurer. Greater transparency in the insurance relationship — from the insurer to the broker to the insured — seems to be a likely outcome of the Spitzer investigations. “Us versus them” scenarios are not healthy in a business relationship between any buyer and seller. For better or worse, the relationship between a buyer and seller of insurance (which is a product and a service, and the presence of which affects the financial integrity of both the insurer and the insured) — and the broker as intermediary on behalf of the buyer — creates somewhat of a symbiotic relationship among all three. If the “Spitzer position” shows that the relationship is out of balance, all of the parties — including the corporate insured — should be prepared to become involved in restoring that proper balance. Bruce D. Celebrezze, a partner in the San Francisco office of Sedgwick, Detert, Moran & Arnold, co-chairs the firm’s insurance coverage and bad faith litigation group.

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