Mass. Reports $4M Judgment Against Insurance Broker Wm. Gallagher

December 21, 2007

Massachusetts officials say they have won a $4 million judgment against a large Boston-based insurance broker over questionable compensation and reinsurance practices.

Attorney General Martha Coakley’s office reported that it filed a complaint and a consent judgment against William Gallagher Associates Insurance Brokers, Inc. for allegedly billing customers for unauthorized and undisclosed compensation and misleading customers about the brokerage firm’s contingent commission practices and involvement in reinsurance.

The consent judgment, filed in Suffolk Superior Court in Boston, is subject to approval by the court.

According to the attorney general’s team, under the terms of the consent judgment, WGA agreed to return $3,017,003 to 11 clients, pay at least $925,000 in sanctions and attorneys fees to the state, and submit to a binding audit of its Energy and Environmental practice group.

Officials said the judgment also requires WGA to send notices to more than 700 customers to correct prior allegedly false representations the company made regarding its employees’ knowledge of contingent commissions and WGA’s participation in reinsurance.

WGA has also agreed to provide customers with written notice of all fees and commissions in the future, they said.

“This investigation revealed certain deceptive practices that inflated insurance costs for numerous businesses,” said Coakley. “We are pleased that under the consent judgment these businesses will recover their losses, and the practices will cease and be appropriately remedied. In addition, the relief set forth in this consent judgment adds needed transparency and fair dealing for businesses seeking various insurance coverages.”

According to the attorney genera’s complaint, the investigation found that WGA charged clients undisclosed and unauthorized fees that exceeded customers’ insurance premiums by 20% to 100% and that the company double-billed certain customers by charging brokerage fees while simultaneously charging undisclosed standard commissions.

To deceive customers into paying such charges, the company allegedly altered documents it received from insurance companies, secured misleading premium financing contracts, and kept two sets of accounting records, one to track actual numbers, and the other to generate fictitious records for clients. Through these practices, WGA took millions of dollars in compensation that customers believed were part of their insurance premiums, according to the complaint.

The investigation further uncovered that on several occasions, employees in WGA’s Energy and Environmental practice instructed insurance companies to increase the prices offered to a WGA customer. Additionally, WGA kept a $125,000 premium refund that it should have returned to its client, according to officials.

The complaint alleges that in 2004, in an effort to quell customer concerns about contingent commissions, WGA falsely represented to clients that it did not inform its account executives of the details of WGA’s contingent commission plans. However, according to the complaint, WGA did provide information about these plans to its account executives and stressed placing and renewing business with insurers that paid WGA lucrative contingent commissions.

The complaint further elaborates:

Nearly all of WGA’s managing account executives were aware that the insurance company The Chubb Corp. loaned nearly $3 million to WGA and that Chubb would forgive this loan and accrued interest under WGA’s contingent commission program with Chubb.

WGA’s CFO wrote in his 2003 self evaluation that he monitored WGA’s contingent commission results and analyzed “…what agreements would be most lucrative (and where we should direct our business), which would be salvageable (and the associated trade-off) and which were unattainable. Communication was provided to staff during [management] and Sales Meetings.”

A former WGA employee wrote in an email that she was “pushed” to renew a customer’s policy with Chubb even though she felt that better pricing and terms were available from another insurance company.

After insurance market Lloyd’s of London lowered its commissions in 2002, WGA’s President suggested “…let’s put our Lloyds business with Chubb where we get Profit Sharing.”

Finally, the complaint alleges that WGA owned an equity interest in a Chubb-sponsored reinsurance company called Mountain View Indemnity, Ltd. Through MVI, between 1999 and 2004, WGA reinsured a portion of more than 100 insurance policies that belonged to its clients, thereby creating a conflict of interest that WGA failed to disclose and actively misrepresented to customers, according to the investigators.

WGA did not reply to a request for comment.

Source: Massachusetts Attorney General

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