Insurance Scandal Touches S.C.

October 23, 2004

An unfolding scandal involving some of the biggest names in the insurance industry has claimed one victim in South Carolina, and there could be others.

A high-profile civil suit spearheaded by the New York Attorney General’s office against Marsh & McLennan, the world’s top insurance broker, prominently mentioned the Greenville school system in outlining a host of questionable and illicit industry practices.

Though only the school district was cited, the Port of Charleston and presumably other big companies in the state do business with Marsh.
Repeated references to the Greenville school system in the 31-page court document filed in New York on Oct. 14 alleged that Marsh rigged the bidding process to tilt business toward a favored client. As a broker, Marsh was supposed to shop around and select the companies with the best rates to insure the school district’s $968 million building and renovation project.

Instead, Marsh is accused of submitting a sham bid that was artificially high to give the appearance of competition. The court papers also say it tried to squeeze a “contingent commission” agreement out of an insurance company in exchange for steering business its way. Such shadowy commission deals have been under investigation for a while, but this case sheds some light on how the line of legitimacy been crossed.

Since the 1970s, it has been common practice for insurance companies to pay contingent commissions to brokers. These are fees “contingent” on factors like profitability and recurring business, and they are paid in addition to the standard commissions based on a dollar percentage of premiums.

Marsh, in Spitzer’s view, took these commissions to a new, and possibly illegal, level in the 1990s when it began demanding insurers pay commissions to be considered for a contract.

To many insurance companies and New York Attorney General Elliot Spitzer, that sounded a lot like kickbacks. In 2003, Marsh took in about $800 million in such fees, Spitzer’s suit said.

“In these arrangements there’s a potential conflict of interest for the broker to gravitate toward higher fees instead of doing his or her best for the client,” said Melissa Gannon, vice president of Weiss Ratings, an independent research firm in Florida.

In the Greenville case, it’s unclear whether the school system was financially harmed, but there is potential that it paid too much for its insurance.

The Port of Charleston, meanwhile, has been buying its property and casualty insurance through Marsh for the past five years, but officials there feel they have been getting a fair shake.

“We have not been dissatisfied with our coverage or rates,” said Byron Miller, the port’s spokesman. “We’re always looking for more insurance for less money. … We understand the nature of this market and are satisfied with the service we get.”

South Carolina’s attorney general’s office and Department of Insurance would say only that they were working in tandem with their counterparts in other states to look into the allegations. Neither would comment on whether other South Carolina companies may have been victimized.

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