That’s not good news for buyers of insurance.

You probably are well aware that when purchasing insurance for your firm, you’ll pay a broker either a flat fee for finding coverage or a commission based on your purchase of a policy. Less obvious are what are known as “contingent fees” or “contingent commissions.” These are “back door fees paid by insurance companies,” says Terry Fleming, vice president of RIMS, or the Risk and Insurance Management Society, as well as director of risk management with Montgomery County, Maryland. Not surprisingly, they can raise your firm’s insurance expense.

Here’s how they can work: the insurance company typically promises to pay the broker a commission based on some criteria. For instance, the broker may need to sell a certain number of policies or keep some percent of current customers during a given year. The commissions, which don’t have to be disclosed, can prompt brokers to steer clients to policies that aren’t in their best interests.

Contingent commissions have been in the news lately because the regulations surrounding them have been changing — and not for the benefit of buyers of insurance. In July, the Illinois Attorney General and Illinois Department of Insurance agreed to allow Arthur J. Gallagher, an insurance broker, to accept contingent commissions across all lines of business. The company, in its quarterly earnings report, said it expects to earn about $10 million annually from contingent commissions by 2011.

Also in July, the state of New York revised its proposed regulations on contingent commissions. Under the new wording, insurance buyers are forced to request information on compensation from their brokers, who have no obligation to disclose it. In addition, renewals of insurance contracts are exempted from disclosure requirements altogether. “RIMS argues that it is equally important for insurance consumers to know how the producer is compensated in a renewal as it is in the original policy transaction,” the organization said in a release.

RIMS, which represents corporate risk managers as well as those with nonprofit and governmental organizations, has been calling for a prohibition on contingency fees. Failing that (which appears likely, Fleming says), RIMS would like to see mandatory disclosure of contingency fees. At this point, it doesn’t appear that any states require such disclosure, according to Fleming.

To be sure, contingent fees aren’t going to be a deal-breaker for every company that’s working with a broker. The real concern is that you know how and how much your broker is getting paid, so you decide whether he or she is worth the money. Mandatory disclosure would alleviate that conflict of interest that’s inherent in insurers’ use of contingency fees. “The broker is supposed to represent the buyer, but takes money from the seller,” Fleming says. “The only way to get around that is through disclosure.” ###