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New York Attorney General Eliot Spitzer on Oct. 14 sued Marsh & McLennan Companies, the nation’s biggest insurance brokerage firm, alleging that it steered clients to insurers with whom it had lucrative contingency agreements, and solicited rigged bids from major insurers for insurance contracts. Spitzer also announced that two insurance company executives have pleaded guilty to criminal charges in connection with the scheme.
The actions against the brokerage firm, Marsh, and the two American International Group (AIG) executives stem from what Spitzer said is a widening investigation of fraud and anti-competitive practices in the insurance industry.
The lawsuit also implicates major insurance carriers The Hartford, ACE Ltd. and Munich American Risk Partners. Other insurance companies are still under investigation.
Marsh’s parent firm, Marsh & McLennan Companies (MMC), issued a statement promising full cooperation and vowing to deal with any wrongdoing: “We take very seriously the allegations made public by Attorney General Spitzer today. We have been cooperating with the Attorney General’s investigation since it began in the spring but have not been made aware of the charges until now. We are committed to getting all the facts, determining any incidence of improper behavior, and dealing appropriately with any wrongdoing,” the firm stated.
The board of directors of MMC, Inc. also issued a statement that said an independent review is underway. “Pending the results of the review, we will not draw any conclusions. We have full confidence in the company’s leadership. When the review has been concluded, the board will take all appropriate action in the interests of our shareholders, employees and our clients,” the board’s statement added.
AIG revealed that the two executives who have pleaded guilty worked for its excess casualty unit, American Home Assurance Company. “We are saddened by this news because we hold ourselves to the highest ethical standards. Any breach of those standards is unacceptable,” AIG said in a statement.
TheStreet.com identified the two as Karen Radke, senior vice president, and Jean-Baptiste Tateossian, manager, at American Home. AIG said that it takes the charges seriously and will continue to cooperate with Spitzer’s office.
In a statement, The Hartford said it is cooperating fully with the investigation. “The Hartford does not condone bid-rigging or any other illegal activity. Our corporate policy is very clear,” said Cynthia Michener of the company’s media relations department.
ACE Ltd. also issued a response. “Although ACE is not named as a defendant, ACE and several other insurers are referenced in the complaint. We have been cooperating with the Attorney General’s office since earlier this year in this matter, and we intend to continue to cooperate fully with the investigation,” the company stated.
American Re issued a statement on behalf of its Munich American Risk Partners subsidiary: “Munich-American RiskPartners is not a defendant in that complaint. Munich-American RiskPartners has been cooperating with the Attorney General’s office in this investigation and will continue to do so.”
Spitzer suggested that his investigation could lead to substantial changes in the way insurance brokerages are run.
“The insurance industry needs to take a long, hard look at itself,” Spitzer said. “If the practices identified in our suit are as widespread as they appear to be, then the industry’s fundamental business model needs major corrective action and reform. There is simply no responsible argument for a system that rigs bids, stifles competition and cheats customers,” he added.
Spitzer was joined at the news conference announcing the actions by New York State Insurance Superintendent Gregory V. Serio, who said: “This has gone from an inquiry into failure to disclose compensation to an active investigation of bid rigging and improper steering. This certainly proves the adage that where there is smoke, there is fire.”
The civil complaint filed in State Supreme Court in Manhattan alleges that for years Marsh received special payments from insurance companies that were above and beyond normal sales commissions. According to the complaint, these payments—known as “contingent commissions”—were characterized by Marsh as compensation for “market services” but were, in fact, the complaint continues, rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies.
Spitzer maintained that his office has uncovered “extensive evidence” showing that this practice of steering business to achieve contingent payments “distorts and corrupts the insurance marketplace and cheats insurance customers.”
The complaint further maintains that in addition to steering business to its insurance company partners, Marsh, at times, solicited fake bids, which deceived its customers into thinking that true competition had taken place. Marsh did this even as it claimed in public statements that its “guiding principle” was to always consider its client’s best interests, Spitzer charged.
Spitzer’s complaint against the company cites internal communications in which executives appear to discuss actions that were aimed at maximizing Marsh’s revenue and insurance companies’ revenues. For example, one senior Marsh executive allegedly sent a message to colleagues saying: “We need to place our business in 2004 with those [insurance companies] that have superior financials, broad coverage and pay us the most.”
Another executive is claimed to have noted that the size of contingent commissions will determine “who [we] are steering business to and who we are steering business from.”
The two executives who pleaded guilty to participating in the illegal conduct are expected to testify in future cases.
According to the complaint, Marsh collected approximately $800 million in contingent commissions in 2003. Spitzer’s civil complaint seeks an end to the steering and bid rigging, disgorgement of improper payments, restitution and punitive damages.
The customers who were “victims” of the allegedly illegal practices were mainly large corporations seeking property and casualty coverage, as well as some small and mid-size businesses, municipal governments, school districts and individuals. Examples of clients cited in the complaint include Fortune Brands, a maker of golf balls and whiskey, and the Greenville, S.C. school department.
The lawsuit claims that Marsh boasts in its marketing that, “We are our clients’ advocates, and we represent them in negotiations. We don’t represent the [insurance companies].”
But Spitzer’s complaints says the facts show otherwise. “Since at least the late 1990s, Marsh has designed and executed a business plan under which insurance companies have agreed to pay Marsh more than a billion dollars in so-called ‘contingent commissions’ to steer them business and shield them from competition. Styled as payments for nebulous ‘services,’ the agreements to pay these commissions were called ‘placement service agreements,’ and, most recently, ‘market services agreements’ by Marsh. Whatever the agreements were named, they created an improper incentive for Marsh.”
The complaint cites an instance in which an insurance company president who was seeking to expand her firm’s sales, said that a Marsh executive did not advise her to provide a better product to Marsh’s clients; instead, he told her that she would need to enter into a contingent commission agreement paying Marsh an amount that was “above market.”
In addition to allegedly steering accounts to insurers to obtain contingencies, Marsh is also charged with soliciting fictitious quotes from willing insurers “in order to deceive its clients into believing that true competition had taken place. It promised to protect insurance companies from competition, and did so. And it threatened to hurt the business of those who thought of truly competing for particular pieces of business.”
The lawsuit maintains that Marsh’s business plan has been “phenomenally profitable,” citing reports that approximately $800 million of Marsh’s earnings in 2003 were attributable to contingent commission payments. That year, Marsh overall reported approximately $1.5 billion in net income.
The success Marsh has enjoyed has been the result of planning, according to the attorney general. “Marsh reconfigured its brokerage business, centralizing power in a group based in Manhattan. Marsh created lists of those insurance companies whose products its employees were to sell more vigorously to clients, lists based not on price or service, but on the amount of money the insurance companies would pay Marsh. It rewarded those employees who sold clients more insurance from these complicit insurance companies, and it chastised those who did not,” the complaint maintains.
According to the complaint, Marsh has never disclosed to its shareholders how significant contingent commissions are to its business. Citing an analyst conference call on July 28, 2004, the complaint quotes Jeffrey Greenberg, chief executive officer of Marsh, as saying: “We don’t break out contingent commissions. That is not separately enumerated because it is part of our business model….”
Marsh Inc. announced an immediate suspension of its practice of market services agreements (MSA) or PSAs with insurance carriers.
The complete text of Attorney General Spitzer’s complaint can be found at:
http://access.adobe.com/perl/convertPDF.pl?url=http://www.oag.state.ny.us/press/2004/oct/oct14a_04_attach1.pdf?OpenElement.