MUSINGS ON MGU CONFLICTS OF INTEREST
MUSINGS ON MGU CONFLICTS OF INTEREST
Conflicts of interest are all the rage these days.
For our purposes, a working definition of a conflict is “a situation in which the concerns or aims of two different parties are incompatible;” another is: “a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity.” With or without knowing it, MGUs find themselves in conflict situations repeatedly. It is inherent in their business, unless they are a captive of a carrier offering only one flavor of paper. Even then conflicts can arise.
The profit motive is, quite appropriately, the main driver for MGU operations. For this obvious reason, relationships with producers are extremely important. But for the same reason, so are relationships with the carriers the MGU represents.
MGUs representing multiple carriers face a conflict situation whenever a marginal claim comes in from an important producer. The MGU is inclined to give the close call to the group and pay the claim in that situation to protect and foster goodwill with the producer through which the group came.
Legally, the MGU has no fiduciary duty to the group or the producer. However, the MGU does owe such duties to the carrier on whose paper the claim arose, both by virtue of the MGU’s status as an agent of the carrier, and those stemming from the terms of the MGU agreement with that carrier. At common law, these duties include absolute fidelity and loyalty and an obligation always to act in the best interests of its principal, the carrier. In addition, the typical MGU agreement imposes a duty to consult with the carrier on all claims over an agreed-upon amount.
In this sense, the motive to curry favor with the producer can be a conflict. What conflict, you say? Isn’t it in the carrier’s best interest to have more and more business with the producer? Why aren’t the interests of the carrier and the MGU perfectly aligned here? They are, so long as the MGU makes full disclosure to the carrier and the carrier agrees to the payment of the claim. Absent that, the MGU is making a decision to spend the carrier’s money without its knowledge or consent. If the MGU agreement has a “must consult” provision for claims over a specified amount, one could plausibly argue that the carrier has contractually delegated all claims decisions under the applicable amount to the MGU.
The problem becomes exponentially knottier where the MGU has placed paper with the producer from two different carriers that the MGU represents. Then, a decision to pay a marginal claim on one carrier’s paper uses another carrier’s money to curry favor with the producer at hand. The MGU is motivated to convince the carrier’s whose money is at stake that the claim should be paid, but the decision also inures to the benefit of the carrier that is paying nothing. If such situations are balanced in the same ratio as the percentage of each carrier’s business with the producer in question, there is arguably no problem. But it is unlikely in the extreme that this would ever actually be the case.
The cure? Again, the panacea for all conflict of interest problems: full disclosure to the paying carrier. Full disclosure of what? Disclosure that the MGU has two carriers for which it writes paper through this producer, and the approximate ratio of the business the MGU has with each carrier through this producer.
Sound crazy? In my judgment, fairness and the law require it.
Another venue for the MGU conflict comes up in the underwriting sphere. If the MGU represents two or more stop loss carriers, which paper shall it recommend to the producer? I frankly don’t know if carriers ever get data from MGUs about which product is offered to whom. It may often just come down to premium rates and deductibles. Or it may not, if the MGU has a preferred carrier. I think such data should be disclosed on an annual basis to each carrier the MGU represents.
Conflicts are uncomfortable. We want not to see them. But they are very much there, lurking in the dark.