In separate but related move, N.Y., Conn., Ill. tell four insurers contingent commissions no longer an option
Ten states, led by Texas and its Attorney General Greg Abbott, have come to terms with Zurich American, closing their probe into the insurer’s involvement in alleged bid-rigging and unfair compensation practices in the commercial insurance market.
The multi-state settlement finalized in Texas is part of a larger settlement requiring Zurich to pay $121.8 million in refunds to commercial policyholders in the U.S., fully disclose all compensation paid to commercial brokers and agents and implement various business reforms.
Zurich denies that its activities violated any laws and does not admit any liability but the insurer agreed to settle to avoid lengthy legal proceedings.
The multi-state coalition involved in this settlement includes the attorneys general of California, Florida, Hawaii, Maryland, Oregon, Texas, West Virginia, Massachusetts, Pennsylvania and Virginia, the Florida Chief Financial Officer and the Florida Office of Insurance Regulation.
Zurich has also agreed to stop engaging in the practices that the states allege resulted in violations for 10 years.
“Today’s settlement brings greater transparency and fairness to the commercial insurance markets in Texas and across the nation,” said Attorney General Abbott. “This settlement paves the way for states to protect businesses from falling victim to the kind of deception that raised insurance prices above competitive levels.”
The multi-state investigation alleged the company participated in deceptive bid-rigging, price-fixing and other schemes in the commercial insurance market, orchestrated by Marsh & McLennan and other large brokers. In the process, large and small companies, nonprofit organizations and government offices that purchased commercial lines of insurance from Zurich were misled into believing they were receiving the most competitive commercial premiums available, according to the states.
The states contended that Zurich showed a willingness to submit fake quotes and was rewarded with protection from competition so it could set artificially high premiums and profit on other lucrative accounts. The brokers also engaged in anti-competitive conduct by steering contracts away from insurance companies that refused to participate in the scheme, the states said.
The states maintain that the scheme was successful because insurers such as Zurich failed to disclose to policyholders that they paid secret “contingency commissions” to the large insurance brokers.
With this multi-state settlement, Zurich is agreeing to end that secrecy by disclosing all compensation that it pays its agents and brokers for commercial lines business. It will deliver a compensation disclosure statement before a commercial insurance policy is bound. The statement shall disclose any base compensation paid, including the maximum percentage of the premium paid for each commercial policy. Also, the disclosure form shall inform insureds whether contingent compensation may be paid to the broker or agent, including the maximum percentage of contingent compensation that could be paid, the average percentage paid by Zurich in the immediately preceding calendar year and the factors that Zurich will consider in determining the percentage of contingent compensation to pay.
Zurich will also pay $20 million to the investigating states to defray their costs and fees.
The Texas-led multi-state settlement is separate from a three-state agreement Zurich signed with attorneys general for New York, Illinois and Connecticut, and the New York Department of Insurance. Under that agreement, which is called the Three-State Agreement, Zurich agreed to create an $88 million fund for policyholders that purchased or renewed excess casualty insurance policies, other than workers’ compensation policies, issued by Zurich through Marsh & McLennan Companies Inc., or Marsh Inc., from Jan. 1, 2000 through Sept. 30, 2004.
On Nov. 30, New York Attorney General Eliot Spitzer notified ACE, AIG, St. Paul Travelers and Zurich that under those agreements reached with his office earlier this year, they may no longer pay “contingent commissions” to agents and brokers who sell automobile, homeowners and certain other insurance products.
Under the Three-State Agreement, the insurers must change their compensation structure for brokers and agents in any type of insurance where more than 65 percent of the insurance is sold by companies that do not pay contingent commissions. Spitzer said this 65 percent “tipping point” has been reached for homeowners, personal automobile, boiler and machinery, and financial guaranty insurance. As a result, the four companies must stop paying contingent commissions for these insurance products beginning on Jan. 1, 2007. They have already given them up for excess casualty insurance.
Agents expressed distain with the decision, calling the order “grossly unfair.”
“It is grossly unfair to impose contrived restrictions on the ability to compensate producers in a legal and honest manner,” said National Association of Professional Insurance Agents Executive Vice President and CEO Len Brevik.
Independent Insurance Agents & Brokers of America CEO Robert A. Rusbuldt said carriers are now unable to use what otherwise is a perfectly legal way to compensate their sales forces. He noted contingent compensation is done in virtually all industries across America. “The independent agent and broker community is greatly distressed by this development,” Rusuldt said.
Details on the Zurich settlements can be found at: http://www.insurancebrokerageantitrustlitigation.com/zurich/
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