Keeping Up with Insurance Brokerage Investigations

Recent Key Developments in Ongoing Probes of Marsh, Other Brokers and Insurers

Marsh ‘Hopeful’ of Quick Settlement
Marsh & McLennan has been in constant contact and cooperation with New York Attorney Eliot Spitzer and 26 other states investigating its insurance brokerage practices and while the ultimate objective is to settle all complaints, no timetable for a settlement with Spitzer or other officials has been set, according to the company. That clarification came after Blumberg News reported that Michael Cherkasky, Marsh & McLennan chief executive, said he is “hopeful” that a settlement of the lawsuit brought by Spitzer will get done by the end of this year. Barbara Perlmutter, spokeswoman for Marsh & McLennan, told Insurance Journal that while Marsh ultimately desires to settle all complaints, there is no guarantee this will be accomplished by year’s end. But MMC is cooperating with all officials, she said.

N.Y. Hearing on Marsh Moved to Jan. 18
A public hearing on Marsh & McLennan Companies Inc. that was scheduled by the New York Department of Insurance for Nov. 23 was rescheduled to Jan. 18, 2005. Officials said the hearing was moved due to the ongoing joint investigation by the department and the New York attorney general’s office.

Marsh & McLennan Cuts Internal Executives from Board
Embattled insurance broker Marsh & McLennan Companies Inc. announced that five members of its board of directors–all of them executives of the company–are leaving the board. The company’s board now consists of Michael G. Cherkasky, the company’s president and chief executive, and 10 “outside” members, the New York-based company said. Robert Erburu, lead director of Marsh & McLennan’s board, said the decision was “in keeping with the company’s commitment to adhering to corporate governance best practices.” Corporate governance advocates encourage companies to limit the number of corporate executives on their boards, favoring outsiders who are considered to have less self-interest in company decisions.

Maine Preparing Compensation Questionnaires for Largest Brokers
Maine has joined the nationwide investigation into price fixing and other abuses in the insurance industry. Maine Insurance Superintendent Al Iuppa said his department is working with the National Association of Insurance Commissioners as part of the information-gathering part of a collaborative investigation. He said his department is preparing questionnaires for insurance brokers, agents and companies. Only the largest brokerage houses will be asked to fill out the questionnaires as part of the probe, according to Iuppa.

Calif. Files Suit Against ULR and Insurers
California Insurance Commissioner John Garamendi announced a lawsuit against Universal Life Resources of San Diego and four major insurers accused of hiding millions of dollars in secret commissions. Garamendi also disclosed that a settlement had been reached with ULR requiring it to end these practices immediately. The suit, filed in California Superior Court in San Diego, names MetLife Inc., Cigna Corporation, Prudential Financial Inc., and UnumProvident Corporation as defendants. They are accused of collaborating with ULR to carry out schemes that caused financial harm to California consumers.

State Regulators Reveal Model Disclosure Act
The National Association of Insurance Commissioners (NAIC) released draft model legislation requiring brokers and other producers to disclose their compensation. The draft legislation would amend the NAIC’s current Producer Licensing Model Act. Brokers would be required to first obtain the insured’s written consent before receiving compensation from the insurer for the same transaction. In addition, brokers would be required to disclose the amount of compensation from the insurer, including any contingent compensation. In those cases where the contingent commission is not known, brokers would be required to provide a reasonable estimate. In addition, every insurance producer would have to disclose to customers: that the producer will receive compensation from the insurer and may receive additional compensation based upon other factors, such as premium volume or claims experience. State regulators have vowed to adopt model disclosure language by the end of the year. A hearing on the model bill will be held this month in New Orleans.

U.S. Senate Panel Holds Hearing
Marking the first congressional inquiry since allegations of abuse in the commercial insurance brokerage industry emerged, U.S. Sen. Peter G. Fitzgerald (R-Ill.) chaired a Senate subcommittee oversight hearing of insurance brokerage practices on Nov. 16. Fitzgerald called the hearing in his capacity as chairman of the Governmental Affairs Subcommittee on Financial Management, the Budget and International Security. The subcommittee heard from New York Attorney General Eliot Spitzer, Connecticut Attorney General Richard Blumenthal, California Insurance Commissioner John Garamendi, New York Insurance Superintendent Gregory Serio, and leading industry groups.

Zurich Underwriters Plead Guilty
New York Attorney General Eliot Spitzer revealed that two employees from a third insurance company–Zurich American Insurance Company–have pleaded guilty to criminal charges in connection with a bid rigging scheme. According to the Associated Press, the two senior underwriters were John Keenan and Edward Coughlin, who worked in the specialties excess casualty unit at Zurich and dealt exclusively with Marsh Global Broking. Five executives at three major insurance companies have now pleaded guilty to criminal charges in the probe. Last month, two executives at AIG and one at ACE pleaded guilty to similar charges. All who have entered criminal pleas are expected to testify in future cases.

Spitzer Sues Universal Life Resources
New York Attorney General Eliot Spitzer charged in a civil suit in the state Supreme Court in Manhattan that Universal Life Resources of San Diego, which brokers life, accident and disability policies for leading U.S. companies, pocketed millions of dollars a year in hidden payments from insurers and from charges on clients’ unsuspecting workers. Spitzer said the ULR case “manifests the same conflicts of interests and gaming of the system” that he alleges in his Marsh & McLennan suit. The civil suit seeks to end the company’s so-called “secret agreements” with insurers, the disgorgement of improper payments and restitution for injured parties. Spitzer’s suit mentions Metlife, Prudential and Unum Provident as among the companies writing policies brokered by ULR. Asked why the insurers weren’t directly charged, Spitzer said, “all in due course.”

Mass. AG Probes Health Brokers’ Pay
The Massachusetts attorney general’s office is scrutinizing the practice of health and benefit insurers offering lucrative commissions to brokers who are supposed to lock in the best deals for employers. Brokers generally receive a standard commission, generally 2 to 4 percent, which is taken out of employers’ premiums. These basic commissions are disclosed to most employers, as required by law. Since the mid-1990s, health insurers began paying volume bonuses to brokers for enrolling large numbers of employers and for re-signing them in future years. Brokers and insurers said they generally do not disclose these payments. Blue Cross and Blue Shield of Massachusetts, Harvard Pilgrim Health Care and Tufts Health Plan acknowledged they have bonus plans for their top producers. Alice Moore, chief of the public protection bureau for Attorney General Thomas F. Reilly, declined to say which specific insurers or payment plans the attorney general is reviewing. So far, the inquiry is preliminary, and there are no known allegations of wrongdoing.

Canadian Insurance Industry Releases Disclosure Plan
The Insurance Bureau of Canada revealed details of a plan to provide enhanced access to information in insurance sales and service. Components of the plan include a Code of Consumer Rights and Responsibilities, and an industry commitment to Web disclosure of details on distribution compensation and ownership links. The consumer code describes key consumer rights such as the right to clear information about coverage and the claims settlement process, and the right to information about how their insurance sales representative is being paid. Companies will provide full disclosure on their Web sites by Jan. 1, 2005, of information concerning the way in which their sales intermediaries–agents, brokers, staff and other intermediaries–are compensated. Other information concerning company ownership links of brokerages and financing links will also be made public. Insurance Bureau of Canada member companies write more than 90 percent of the private property casualty insurance in Canada.

The Hartford Releases Pair of Employees
The Hartford announced that two of its employees have been dismissed after the company concluded that they were not fully cooperating with the investigation by New York’s attorney general. According to the company, the pair worked for The Hartford’s property/casualty operations in Los Angeles. The company said that all employees have been instructed to provide assistance with the external investigation and the internal review. Joshua King, a spokesman for The Hartford, said, “Our conclusion that these employees failed fully to cooperate with The New York Attorney General gives us no alternative but to part ways with them.”

Marsh to Lay Off 3,000 as Part of $400M Expense Reduction Plan
Marsh & McLennan Companies Inc. revealed it would lay off about 3,000 employees as part of a plan to reduce annual expenses by $400 million. About three-quarters of the layoffs will occur in the insurance and risk management sectors, the company said. The company also reported the effect of the elimination of market service agreements that have become the target of investigations. Market services revenues declined to $46 million in the third quarter of 2004 from $177 million in the prior year. In addition, MMC announced it would establish a $232 million reserve to be used in connection with any settlement agreement that may be reached with New York’s attorney general.

Conn. AG Expands Insurance Probe to Municipalities
Connecticut Attorney General Richard Blumenthal expanded his investigation into allegations that insurance bids were rigged by examining whether unlawful practices have affected municipalities in the state. In a letter to each of Connecticut’s 169 cities and towns, Blumenthal requested information on insurance they purchased over the past five years. He also asked for the name of any insurance broker used to procure insurance and the names of insurance companies that provided coverage. Blumenthal said he does not know of allegations by municipal officials who believe bid rigging or other unlawful practices detailed in New York Attorney General Eliot Spitzer’s lawsuit have occurred. “We haven’t received complaints, but the victims of these abuses would be very unlikely to know of bid rigging or price-fixing,” he said.

Class Action Accuses St. Paul Travelers
A law firm filed a class-action lawsuit against St. Paul Travelers Cos., accusing it of making false and misleading statements regarding commission payments. The lawsuit, filed by the New York law firm of Wolf Haldenstein Adler Freeman & Herz in U.S. District Court in Minneapolis, alleges that the company paid hundreds of millions of dollars in “bribes or kick-backs, known as ‘contingent commissions,’ in return for insurance brokers steering them business and shielding them from competition” from 2000 to 2004. The lawsuit also alleges that the company’s actions artificially inflated the price of the company’s common stock. The company’s “revenues and earnings would have been significantly less had the company not engaged in such unlawful practices,” it claims. “We believe this suit is totally without merit and we intend to defend against it vigorously,” said Joan Palm, a spokeswoman for St. Paul Travelers. Lawyers have filed similar lawsuits against several insurance companies and brokers across the country recently, including American Insurance Group and ACE Ltd.

Topics Lawsuits California Carriers USA New York Agencies Connecticut Maine Canada