Wholesale Confusion

Since being stripped of his broker’s license in Ontario 10 years ago, Ian Stuart, 56, has made quite a name for himself – several names for himself, Canadian and U.S. authorities allege – selling commercial insurance policies as a self-styled “wholesale” broker.

In the process, Stuart, based in Newmarket, Ontario, has become a near-mythical figure within the insurance industry. He is a well-renowned (and moving) target of provincial court orders and insurance broker regulators throughout Canada.

Over the past 10 years, Canadian court and regulators’ orders have variously referred to the same man as Ian Stuart, Ian Stuart-Smith, Ian Stewart, Ian Smith, John Harris, John Harrington and Iain Duncan. For simplicity’s sake, we refer to him here as Ian Stuart.

Mere mention of Stuart’s Mar.15, 2007 extradition to New York – where he has pleaded not guilty to fraud charges – invariably gets brokers talking about the need for the licensing and/or regulation of wholesale brokers in Ontario.

Currently, there is no requirement that wholesale brokers be registered with the Registered Insurance Brokers Organization (RIBO), the brokers’ provincial licensing and self-regulating body. As such, by default, the responsibility for overseeing wholesalers’ conduct falls on the shoulders of the Financial Services Commission of Ontario (FSCO), the regulator of Ontario’s insurance industry. At press time, FSCO confirmed that it would be listing the licensing of wholesale brokers as one of its priorities for 2007.

FSCO’s move was a long time coming, say Ontario’s brokers, who note with grim irony that only the long arm of the United States law has temporarily stopped Stuart from operating as a wholesale broker within Canada. “FSCO did not put [the licensing of wholesalers] in their priorities for 2007 and we had actually written back on their statement of priorities and asked them to include it,” said Insurance Brokers Association of Ontario [IBAO] chief operating officer Randy Carroll. “On the wholesaler [issue], when you take a look at it, the whole Ian Stuart-Smith piece was an embarrassment to the industry as a whole. You have a large [wholesale] segment that the brokers rely on, the consumers rely on, and there really is no check and balance.

“You’ve got some wholesalers who voluntarily go through the RIBO-style audit because they have some brokers working for them, but for the most part, when you take a look at that side of the business, it’s pretty much open in regard to how they operate…”

In the United States, the U.S. Attorney for the Southern District of New York announced in May 2006 that it had charged Ian Stuart (a.k.a. “Ian Stuart-Smith,” a.k.a. “John Harris,” a.k.a. “John Harrington”) in connection with a US$7-million insurance fraud scheme.

None of the U.S. attorney general’s fraud allegations against Ian Stuart have been proven in court. Stuart had been incarcerated in Lindsay, Ontario, pending his March extradition. An Ontario Superior Court judge denied Stuart bail in a decision dated May 23, 2006. The contents of the decision are subject to a publication ban.

When contacted by phone just prior to Stuart’s March 2007 extradition, Stuart’s lawyer in Ontario, Steven G.R. MacMillan, said he would not comment on any aspect of Stuart’s extradition without the express permission of his client. MacMillan also indicated that he would not be able to obtain Stuart’s permission to speak prior to Canadian Underwriter’s publication date.

Since then, MacMillan’s client has been extradited to the United States.

According to a copy of the New York indictment, Stuart “held himself out to New York insurance brokers as a wholesale insurance broker able to place insurance coverage without being registered as required under New York law.”

Stuart, the indictment continues, “falsely held himself out as an authorized agent for various insurance companies or entities, including underwriters at Lloyd’s of London, Great American Insurance Co., Mount Vernon Fire Insurance Company, Indian Harbor, Colony Insurance, Tower Insurance, Traveler’s Insurance, Houston Casualty, Essex Insurance Company and Markel Insurance.”

The New York indictment further alleges Stuart was operating under the names of several brokerages, including Surplus Lines Inc., Heritage Inc. (also known as Heritage International Inc. and Heritage Agency Inc.) and Rupertsland Insurance Intermediaries Ltd. (also known as Rupertsland Intermediaries Ltd. and Rupertsland).

Stuart’s arrest in and extradition to the United States represents the epilogue of a decade-long interaction between Stuart and Canadian courts and insurance regulatory bodies. For brokers in Canada, Stuart’s story almost invariably lead to outbursts of frustration of the type expressed by Nicholas Smith, the chief agent for Canada of Lloyd’s of London: “I personally, and I think brokers collectively, are disappointed that this man has been allowed to carry on the acts he’s been carrying on in Canada without any authority seemingly taking any action against him,” he said.

In fact, courts and insurance regulators in Canada have issued a number of decisions and warnings since 1997, calling on Stuart to cease and desist his wholesale brokers activities.

CANADIAN PAPER TRAIL

The beginning of Stuart’s history as a wholesaler is pegged at 1997, when RIBO issued a discipline ruling that found Ian Stuart-Smith guilty of misconduct in Ontario for failure to discharge his duties to clients with integrity. Stuart-Smith resigned as a broker, and RIBO subsequently revoked his license in March 1997, fining him $2,500.

Two years later, on Jan. 7, 1999, Ian Stuart-Smith’s name emerged in a bulletin published by the Insurance Council of B.C. The bulletin notes the British Columbia Superintendent of Financial Institutions had ordered Stuart-Smith and his operation at the time, Heritage International Inc., “to cease from either directly or indirectly carrying on insurance business in British Columbia.”

The trail of legal skirmishes moved eastward. In 2002, he was convicted in a Saskatoon Court of Queen’s Bench on charges of uttering a forged document. The judge’s probation order said Stuart-Smith “did knowing that a document, to wit, a certificate of insurance, was forged to cause La Ronde Eagle Point Resort Limited to act upon it as if it were genuine.” The probation order noted Stuart-Smith received a two-year suspended sentence “and is prohibited from acting or holding himself out as an insurance agent, broker, general agent or wholesale insurance broker unless he holds such valid license or licenses as may be required in the jurisdiction in which he proposes to transact business.”

Stuart subsequently re-emerged in Ontario, where wholesale brokers are not required to operate with a license. Notwithstanding this fact, FSCO issued a cease and desist order in 2003 against Ian Stuart-Smith and Heritage International, requiring Stuart-Smith to “immediately cease engaging in securing, placing, attempting to secure, attempting to place, or negotiate insurance coverage sought by members of the public and/or insurance agents and/or insurance brokers on behalf of the agents’ or brokers’ clients.”

In 2004, Lloyd’s obtained a permanent injunction from the Ontario Superior Court requiring Stuart to “cease and desist from in any manner, directly or indirectly, purporting to place business with Lloyd’s…or bind policies of insurance with Lloyd’s or a Lloyd’s Syndicate.”

In November 2005, citing the permanent injunction granted to Lloyd’s, Nicholas Smith of Lloyd’s sent out a notice to the profession warning “brokers and policyholders that neither Marine Risks Limited of Toronto and Miami nor its representative Iain Duncan are approved coverholders or registered open market correspondents and they have no authority from Lloyd’s to place Canadian business in the Lloyd’s market.”

As it happened, the November 2005 Lloyd’s notice, once it was publicly posted, prompted a phone call to Lloyd’s
from Kip Van Kempen of Best Buy Insurance Brokers Ltd. in Ajax, Ontario. Van Kempen said he had acted through a wholesale broker to obtain a $19,000 insurance policy from Lloyd’s. Lloyd’s responded that no such coverage existed.

Van Kempen says when he later presented to Nicholas Smith the Lloyd’s policy he had obtained from the wholesale broker, Smith had a hard time distinguishing the policy from a legitimate Lloyd’s policy.

Van Kempen, who sat on RIBO as a director for a three-year term, wrote to his MPP to urge his local politicians to tighten up any loopholes that would allow wholesale brokers to operate without a license.

“The simplest solution would be to expand RIBO’s mandate to regulate both brokers and wholesalers and make them adhere to similar trust, bond, and E&O requirements,” Van Kempen wrote to his MPP at the time. “Some will use the excuse that regulation is not needed…because [wholesalers] have no direct contact with the public. This is not entirely true, as they are still the recipient of the client’s premium and are the source [to which] the actual insurance documents from the carrier [are delivered].”

WHO IS A ‘WHOLESALER’?

A wholesale broker acts as an intermediary between a registered broker and an insurer. For example, a client may ask a registered broker to provide insurance coverage for a particular line of business. In some cases – if, for example, a broker is unfamiliar with the client’s type of risk, or if the broker does not know of an insurance company that underwrites the client’s type of risk – the registered broker may ask a wholesale broker to place the client’s business with an appropriate insurer. The wholesale broker will find an insurer with whom to place the business.

Typically, the registered broker collects the client’s insurance premium (and any applicable taxes) and places the client’s money into his or her trust account. The registered broker then remits the client’s premium to the wholesale broker (paying any applicable taxes in the process). In the normal course of business, the wholesale broker remits the client’s premium to the insurer; the wholesale broker then provides the insurer’s policy to the registered broker.

LICENSING WHOLESALERS

David Eastaugh, president of the wholesale brokerage Elliott Special Risks Ltd., said it is a “source of great frustration” for professional wholesale brokers who do conduct themselves with integrity and honour to hear any stories that might cast doubt on the integrity of the process.

Elliott Special Risks has been voluntarily registered with RIBO for more than two decades. The company follows RIBO’s licensing requirements, although currently there is no legal obligation in Ontario for wholesalers to do so. Among other things, RIBO requires registered brokers to operate a trust fund, bond employees and carry errors and omissions [E&O] insurance.

Ironically, one of the reasons why insurance regulators haven’t been able to make a stronger case for licensing wholesalers is because the mandate of regulators like RIBO and FSCO is to protect the “public.” But, under the RIBO Act, licensed brokers and insurers – the people who interact directly with wholesalers – do not fall under RIBO’s definition of the “public.”

The public is protected, because the registered broker is ultimately on the hook for the client’s premium funds and the policy coverage. Not only must the registered broker refund any missing premium to a client, he or she is also accountable – i.e. through a claim against his or her E&O insurance – for the fact that the client wasn’t covered by an insurance policy.

But licensed brokers, since they do not count as members of the “public,” are not similarly protected in their interactions with wholesalers, who do not have to be bonded or carry E&O coverage.

FSCO has indicated it is planning to change its priorities in 2007, so that wholesale brokers are required to be licensed. FSCO’s 2007 Statement of Priorities, to be released in April, says FSCO intends to “work with the Ministry of Finance and FSCO stakeholders” to “draft recommendations for the licensing of wholesale brokers and reinsurance intermediaries to enhance consumer protection.”

Eastaugh said he foresees some technical difficulties in trying to capture wholesale brokers within RIBO’s enabling legislation. Even so, it is not the absence of regulation, but rather the lack of response in enforcing court orders that’s “disgraceful,” he says. It’s up to Canadian authorities such as the police to enforce court and disciplinary decisions once they have been made, Nicholas Smith added. Improved vigilance by the authorities will truly protect the public and the insurance industry, they said.