Travelers Settles With States Over Brokers’ Contingent Commissions

January 13, 2008

The Travelers Cos. Inc. will pay $6 million to settle investigations in 9 states and the District of Columbia over how it paid brokers.

The St. Paul-based company said it had reached agreements with attorneys general in Michigan, Florida, Hawaii, Maryland, Oregon, Texas, West Virginia, Massachusetts and Pennsylvania and the District of Columbia. The Florida Office of Insurance Regulation also joined the settlement, which still needs court approval.

The settlement ends a 2004 shareholder lawsuit over contingent payments to brokers and allegations that it rigged bids. The company had lost an earlier effort to dismiss the lawsuit, which sought class action status. Travelers disclosed it had reached a settlement in a filing with the Securities and Exchange Commission.

State attorneys general have argued that “contingent commissions” paid to brokers and agents to steer business to insurance companies amount to kickbacks that result in higher prices paid by policyholders.

Florida Attorney General Bill McCollum’s office said Travelers had been paying “contingent commissions” to brokers which were not disclosed to policyholders.

Travelers has already said it would stop paying such commissions on all insurance lines under an agreement with other attorneys general announced Jan. 2, 2007.

Massachusetts Attorney General Martha Coakley’s office said the consent judgment also mandates disclosure of the types and ranges of compensation Travelers pays to insurance brokers. She said Massachusetts will receive $1.3 million of the settlement monies.

The “settlement helps ensure that brokers truly represent their clients’ interests by requiring greater transparency and disclosure of the types and ranges of compensation paid to insurance brokers on Travelers’ policies,” Coakley said.

“Policyholders have every right to expect fair and honest treatment from their insurers,” said Florida Attorney General McCollum. “We will continue to aggressively demand accountability and transparency from the insurance industry in Florida.”

Florida will receive approximately $1.1 million of the settlement which will fund a reimbursement pool for affected public entity policyholders and repay the state agencies’ costs of investigation.

“Policyholders deserve to know exactly what they are paying for and that they are not paying for hidden charges,” said Florida CFO Alex Sink, who oversees the Department of Financial Services. “I applaud this settlement and commend everyone who worked to make it happen.”

“Florida’s policyholders deserve nothing less than full disclosure in insurance transactions,” said Florida Insurance Commissioner Kevin McCarty. “This settlement continues Florida’s progress toward establishing a national standard for transparency in insurance transactions and reinforces our commitment to protecting Florida consumers.”

According to the complaint, Travelers allegedly participated in an intricate bid rigging scheme in which broker Marsh & McLennan pre-designated which insurance company’s bid would “win” a particular account. To create the appearance of a competitive bidding process, Marsh would instruct certain insurers to submit inflated, intentionally uncompetitive bids. These schemes gave commercial policyholders, which included large and small companies, nonprofit organizations, and public entities, the impression that they were receiving the most competitive commercial premiums available, when they were actually being overcharged, according to the complaint.

Additionally, Travelers was allegedly involved with a “pay-to-play” arrangement centered on the payment of incentive-based contingent commissions, in addition to standard commissions and fees, to insurance brokers. These arrangements were often undisclosed to consumers, and provided an incentive for brokers to steer business to the insurer who offered the most lucrative contingent commissions, often in violation of their clients’ interests, according to the complaint.

Sources: Some Associated Press reporting was used in this story.

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