Repealing Anti-Rebate Laws Could Save Consumers Billions

Joseph Blumenthal, a semi-retired Miami insurance agent, wrote us in June 1975 with an idea. Why not, he asked, challenge as unconstitutional the anti-rebate laws which prevent insurance agents from giving part of their commission to their customers in order to get their business? Good question. So Public Citizen’s lawyers set out to answer it by locating a Florida attorney and working with him to file a law suit against the state’s Department of Insurance.
While the case was pending before the Florida Supreme Court, Mr. Blumenthal passed away and the case was dismissed in 1979. The activist consumer advocate for Dade County, Walter Dartland, filed the case again in 1981 and a few days ago won a unanimous opinion from the Florida district court of appeal. Thus the first step toward allowing competition over insurance agent commissions is underway in just one of the 50 states with similar statutes.

If the Florida insurance department and its insurance industry allies appeal the case to the U.S. Supreme Court and lose, then all 50 state laws are likely to be vulnerable.

These anti-rebate laws were passed early in the century at the demand of the insurance industry. By preventing competition, the companies could avoid unpredictable agent behavior in return for legally price-fixing the commission at higher than market levels. It has been a cushy arrangement for both companies and agencies as they otherwise pledge their allegiance to free enterprise and against government regulation.

Imagine how unsettling it would be were you to shop around for insurance and bargain the local agent into reducing that commission on your behalf. The ‘industry says that it would lead to ruinous competition, unprofessional agent behavior and drive the “better agents” out of business. Presumably, unlike other service industries, the “better agents” need this regulatory welfare handout to protect them from the rigors of the uncouth marketplace.

According to Indiana University Professor, Joseph Belth, if the Florida decision catches on, one effect would be to induce the separation of the price for the insurance policy from the agent’s commission, as is done now in the real estate and stock brokerage industries.

The insurance industry took the Florida case seriously and submitted briefs that advanced virtually every argument that its fertile imagination could construct. It said the anti-rebate law helps guarantee insurer solvency, prevents discrimination among insureds and is necessary for agents whose educational qualifications are at less than high school level. Discounting commissions, the industry argues, also will reduce the incentive for agents to provide consumers with advice and quality information.

None of these arguments persuaded the judges. “The dangers of the misuse of information to the consumer by the unscrupulous or indifferent agent may exist,” they wrote, “but the possibilities of such abuse cannot serve to suppress bargaining or information which might otherwise lead to an informed choice. . . In the absence of any apparent rational relation between the prohibition of rebates and some legitimate state purpose in safeguarding the public welfare, we conclude the anti-rebate statutes…are violative of the clue process clause of the Florida Constitution.”

Consumers will save over two billion dollars a year if these anti-rebate laws are repealed or through court action. Two years ago a Congressional Subcommittee, led by Cong. John LaFalce (D-NY), failed in its drive to over-ride these state laws. The Reagan Administration would not support such a pro-free enterprise effort. But a Florida court may have started something, thanks to the initiative of Joseph Blumenthal. He would have been pleased with the court’s judgement.