Overriders (noun, pl.). When a salesman does very well, his employers typically pay him a cash bonus. It works a little bit differently in insurance, where the salesmen are employed by the customers. Nonetheless, brokers who meet profitability or volume targets are very often paid something extra by the insurers they work with. These payments, known as overriders (or placement service agreements, or contingent commissions), are about as entrenched as overdraft charges on chequing accounts, but to some observers they appear particularly unjust.

Spitzer: legal eagle

Enter Eliot Spitzer, Attorney General of New York State. Eliot is the guardian of those who get the short end of the stick in business transactions, and the all-around umpire of fair play in global capitalism. When hard-done-by musos Dolly Parton, P Diddy, and David Bowie were stiffed by their record labels, it was Eliot Spitzer who came to the rescue. In early May, he ordered the music moguls to cough up $50m in compensation. Time Magazine's Crusader of the Year for 2002 fined Merrill Lynch $100m that year, then set his sights on a dozen other members of the Wall Street elite, culminating in a $1.4bn 'global settlement' about a year ago. Next he took on the mutual funds, making big headlines and forcing Marsh subsidiary Putnam Investments to pay a $110m fine.

Now, New York's new avenger has turned his attention to the insurance sector after being tipped off about overriders by the Washington Legal Foundation (WLF), which describes itself as "the nation's pre-eminent centre for public interest law, advocating free-enterprise principles." WLF says it has one goal: "to defend and promote the principles of freedom and justice." Apparently, then, overriders are un-American.

Mr Spitzer certainly believes they create a conflict of interest. To be sure, he has subpoenaed almost all the leading US insurance brokers to learn more about their overriders with insurance companies. The brokers involved - including Marsh, Aon and Willis - have said they will cooperate completely. Meanwhile the US Council of Insurance Agents & Brokers (CIAB), whose members handle the vast bulk of commercial premiums in the US, declared confidently: "Placement Service Agreements between commercial insurance brokers and the insurance carriers with which they do business are not an issue of concern in the industry."

Yet the broking and insurance industries should be concerned - very concerned.

Mr Spitzer (whose 'Spitzer 2006' website is already on the net touting his re-election to "Secure the promise of New York") is to the industries he latches onto what Counsellor Kenneth Starr was to President Bill Clinton: a relentless nemesis that, like rust, never sleeps. With a big-money target like the insurance sector in his sights, one which is typically loathed by consumers and business customers alike (especially in a hard market), Mr Spitzer is unlikely to concede without a fight. And he was never one to be satisfied by an apology and behaviour modification: it usually takes cash to send him looking for his next victim. And the whiny WLF has said that disclosure is not enough.

Integral overriders

If Mr Spitzer is successful in his crusade, the cost to insurers could be great. A January 2004 research note by JP Morgan Securities showed the importance of income from overriders to the largest listed US brokers.

In the first nine months of 2003, they provided 8.3% of brokerage revenue for Hub International, 7.2% for Brown & Brown, 6.0% for Marsh, 5.0% for Aon and 2.7% for Arthur J Gallagher. More importantly, at the time of the report, the income from overriders accounted for nearly 20% of the brokers' year-to-date earnings. JP Morgan calculated that eight quoted US brokers earned contingent commissions of $687m in 2002.

Insurer anxiety

Should insurers be concerned? Brokers argue that contingency fees provide a just reward for analytical and risk management work that used to be the job of the insurer. Insurers themselves (who rarely admit to paying overriders for volume, but typically crow about profit-based incentives) have been proposed by some pundits as the spoon that stirred up the trouble: ban overriders, and acquisition expenses would fall, the fanciful argument goes. In an historic turning of tables, insurers could even be lined up to receive compensation, rather than endlessly paying it.

Yet it is brokers, not insurers, which are coming under fire, despite their efforts (encouraged by risk management associations AIRMIC and RIMS) to disclose the existence of their contingent commission arrangements to clients. The CIAB argues that overriders "frequently provide a value-added benefit to the commercial customer, who can benefit from the broker's relationship with the carrier," and indeed it may be true, at least with profit-based contingent fees. These encourage brokers to assist their clients with the implementation of risk management best practice, and compensate them for so doing. That appears to benefit everyone, except Mr Spitzer. Satisfied people don't vote for crusaders.