Federal law nixes commission-sharing ban in local insurance code
The federal Gramm-Leach-Bliley Act preempts a provision of the Puerto Rico Insurance Code that disallows that brokers and agents share commissions. The decision was rendered by the U.S. District Court for the District of Puerto Rico in the case of Insurance Commissioner of Puerto Rico v. Doral Insurance Agency, Inc., 2006 U.S. Dist. LEXIS 80333.
The Gramm-Leach-Bliley Act opened competition among banks, securities companies and insurance companies by, among other things, allowing banks to offer investment, commercial banking and insurance services. It particularly seeks to facilitate affiliations between banks and insurance companies. On the other hand, the law attempts to strike a balance between this goal and traditional states' rights to regulate the insurance industry. While in general terms it preempts state insurance laws, Gramm-Leach-Bliley adds that the latter are not preempted as long as they "are substantially the same as but no more burdensome or restrictive than" 13 statutory categories described therein.
Doral Insurance Agency, Inc. is an insurance agency licensed by the Insurance Commissioner of Puerto Rico. A sister company, Doral Bank, Puerto Rico, carried out the sale of insurance policies. The insurance agent shared the commissions that it received from the sale of policies with an insurance broker, also licensed by the commissioner. The commissioner found that the sharing of commissions between an insurance agent and an insurance broker did not conform to the provisions of the Insurance Code. A second adverse finding was that sales were conducted through a money lender (Doral Bank).
The District Court highlighted the commissioner's determination that such sharing represented a conflict of interest between someone who represents the insurer (i.e., the agent) and someone who is to look after the interests of the insured (the broker). Nevertheless, it found that the only limitation imposed by Gramm-Leach-Bliley to the sharing of commissions "is that the insurance agent and the broker hold a valid state license regarding the applicable class of insurance at the time at which the services are performed. Thus, the GLBA completely preempts the interpretation given by the Commissioner [to the Insurance Code] because it stands as an obstacle to the accomplishment and execution of the full purposes of Congress in enacting the GLBA and significantly interferes with [Doral Insurance Agency's] ability to sell, solicit or cross-market insurance, powers recognized under federal law."
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