Travelers Settles With States Over brokers’ Contingent Commissions

The Travelers Cos. Inc. will pay $6 million to settle investigations in nine 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.

Texas Attorney General Gregg Abbott, whose office led the investigation, said Texas would receive $1.6 million of this amount once the settlement receives 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.

The settlement requires Travelers to reform its business practices, including disclosing to its customers the precise amount of compensation it pays to insurance brokers. According to the Texas AG’S office, the investigation found that Travelers participated in widespread deceptive bid-rigging, price-fixing and other schemes in the commercial insurance market. The schemes misled companies and nonprofits into believing they were receiving the most competitive commercial premiums available.

“A free, open and honest marketplace is essential to the success of the Texas economy,” Abbott said. “Unlawful bid-rigging schemes undermine the integrity of our free market system. We will continue working to protect competition and foster economic growth in Texas.”

Florida Attorney General Bill McCollum’s office said Travelers had not disclosed to policyholders the contingent commissions paid to brokers.

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.

Travelers said it would stop paying such commissions on all insurance lines under an agreement with the states’ 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.

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.

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