ALBANY, N.Y. (Legal Newsline) - New York's highest court ruled earlier this month that insurance brokers did not have to tell their customers about incentive agreements they had with insurance companies.
The New York Court of Appeals reached that decision Feb. 17 in a case brought by former state Attorney General Eliot Spitzer against Wells Fargo. Former Attorney General Andrew Cuomo, now the governor, kept the case alive, and Eric Schneiderman succeeded him as attorney general this year.
Spitzer, who became governor but resigned during a prostitution scandal, alleged in 2006 that Acordia and parent company Wells Fargo were steering customers to companies that paid undisclosed kickbacks.
In a unanimous decision, the Court of Appeals said the State never alleged that Wells Fargo made misrepresentations about any such agreements and that any customer was harmed.
"There is no allegation that any customer was persuaded to buy inferior, or overpriced, insurance in order to help Wells Fargo earn its incentives," Judge Robert Smith wrote.
Spitzer said Wells Fargo was funneling its retail banking clients to Acordia for advice about insurance coverage, and that Acordia would steer the business to The Hartford. The Hartford would then pay Acordia, he said.
Smith wrote that Spitzer's complaint essentially alleged a claim for breach of fiduciary of duty.
"In the absence of an allegation that Wells Fargo misrepresented any fact to its customers, or that it did anything to cause actual injury to the customers' interests, the case rests on the rule that one acting as a fiduciary in a particular transaction may not receive, in connection with that transaction, undisclosed compensation from persons with whom the principal's interests may be in conflict," Smith wrote.
"The rule is a sound one in general, but we conclude that it does not apply here."
Several Appellate Division cases recognize the complexity of an insurance broker's role and hold that they do not have to disclose contractual arrangements made with insurers, the ruling says. It says the non-disclosure may be a bad business practice but it is prohibited by new regulations within the Insurance Department.
However, Wells Fargo's alleged actions occurred before that rule was in effect.
"A regulation, prospective in effect, is a much better way of ending a questionable but common practice than what the Attorney General asks us to do here: In substance to outlaw the practice retroactively by creating a new common law rule," the ruling says.
From Legal Newsline: Reach John O'Brien by e-mail at firstname.lastname@example.org.