If you work through a broker when you’re buying insurance for your firm, you probably know that he or she earns a commission when you finally sign up for a policy. Most are based on the overall value of the premiums you pay and compensate the broker for the work of hunting for the policy that best fits your firm’s needs.

However, some brokers also receive “contingent commissions” or “contingent fees,” as I wrote in August. As their name suggests, these charges are contingent upon some outside event occurring, rather than on the sale itself. For instance, a contingent commission may come into play if a broker places more business with a particular insurer.

Earlier this year, insurance regulators in New York, Illinois, and Connecticut allowed three insurance brokerage behemoths – Aon, Marsh, and Willis – to again accept contingent commissions. These three had been restricted from receiving them since 2005, even as other, smaller brokers had been able to accept them, as this article in Insurance Journal points out.

While the change may have leveled the playing field for insurers — that was the argument for removing the ban — it presents an obstacle for corporate buyers of insurance. “Contingent commissions, regardless of the size of the broker, create an opportunity for conflicts of interest,” says Scott Clark, director of the Risk and Insurance Management Society, Inc. (RIMS), external affairs committee and risk/benefits officer with Miami/Dade County public schools in Florida. The reason is simple: They can lead a broker to place an insurance policy with a particular carrier not because the carrier offers the best policy for the customer, but in order to scoop up the commission. By definition, insurance brokers are supposed to represent the buyer, rather than the insurance company, in a transaction. So, contingent commissions present a clear conflict of interest.

The Risk and Insurance Management Society also registered its opposition to the change. “The Risk and Insurance Management Society, Inc. (RIMS), today announced its dismay at a decision by the New York Insurance Department and Attorney General to allow the nation’s top insurance brokerage firms, Aon, Marsh, and Willis, to resume accepting contingent commissions,” RIMS said in a press release at the time.

What’s more, deciphering the exact amount of a contingent commission can be difficult, Clark says. That’s because the occurrence on which the payment is contingent can vary widely, from the number of premiums to the dollar volume of business, to the broker’s ability to place certain lines of business with an insurer.

Even so, contingent commissions need not be an automatic deal breaker. If the overall costs of the transaction seem reasonable and the policy is a better fit than the other options available, it may make sense to work with a particular broker. And, several insurers have said that they will not accept contingent commissions on some transactions.

What’s more important is that you are able to trust and build a relationship with the broker. For that to happen, you need to ask for a breakdown of all the revenue going to the broker. Then, the broker has to provide straight answers. “If you don’t feel like you’re getting an adequate answer, you may want to rethink the relationship,” Clark says. You should walk away with enough information that you have a good understanding of all the money the broker will be earning, as well as the policy itself, and can intelligently compare different policies.

To help, RIMS developed “A Practical Guide to Insurance Broker Compensation and Potential Conflicts of Interest for the Risk Manager.” ###