View this article online: https://www.insurancejournal.com/news/national/2005/08/31/58976.htm
Hilb Rogal & Hobbs Company, a large insurance and risk management intermediary based in Richmond, Va., has reached an agreement with Connecticut Attorney General Richard Blumenthal to settle charges relating to rebating, account steering and broker compensation by its Hartford subsidiary.
HRH has agreed to set up a $30 million fund to reimburse affected policyholders and adopt new rules governing compensation and disclosure.
The company did not admit to any criminal wrongdoing. While the direct settlement with Blumenthal does not assess fines or penalties, HRH is paying a $250,000 fine to the insurance department to close that agency’s parallel investigation of payment by its Connecticut subsidiary of improper compensation on several accounts.
The state complaint against HRH centered on its dealings with a hospital management company. The state claimed that HRH shared commissions with Women’s Health USA Connecticut and steered clients to preferred brokers to win bigger commissions. State law forbids rebating by brokers to clients. Women’s Health Connecticut has denied it received rebates or shared commissions. The settlement indicates that HRH’s Hartford office disguised the deals.
Attorney General Bluementhal’s complaint also addressed a variety of practices that went beyond HRH’s dealings with Women’s Health. The AG had alleged that HRH unlawfully steered clients to favored insurance carriers to qualify for larger bonuses and contingent commissions; moved blocks of clients to favored insurers to qualify for larger bonuses and contingent commissions; implemented a “carrier consolidation” program expressly designed to steer clients to a select group of insurers in order to qualify for larger bonuses and override commissions; placed clients in “producer captive” insurance carriers of which HRH owned all or part without disclosing that ownership interest to its clients; entered into undisclosed fee arrangements whereby insurers paid undisclosed compensation to HRH for the placement of insurance; paid improper premium rebates to clients in return for that client retaining HRH as its broker; and provided preferred insurers with first looks on books of business that HRH wished to move to preferred carriers in order to increase HRH’s bonus and contingent compensation.
“This $30 million settlement is a major milestone in our fight against improper insurance practices – the first to involve personal lines of insurance and to reveal hidden payments to agents as well as brokers,” Blumenthal said. “Hundreds of thousands of ordinary consumers paid higher premiums to insure their homes or cars because HRH secretly steered clients to a select group of insurers in exchange for improper hidden payments. They moved whole blocks of hundreds of clients at a time – owners of homes, cars and small businesses – often to the so-called ‘Big 3,'” which he identified as The Hartford, Travelers and CNA.
“As important as the money for consumers, is the bill of rights: an iron clad guarantee for full candid disclosure to clients of all commissions or other payment. Consumers unknowingly subsidized HRH’s closet kickback scheme because the secret payments were built into the clients’ premiums. These unconscionable business practices raised insurance costs for consumers who were systematically steered in exchange for the biggest bonus to HRH, not the best deal for the client. The scheme also stifled competition, shutting out the dozens of insurers from HRH’s preferred stable.
“Consider this major settlement a win for consumers and a warning to the entire industry that such unconscionable schemes must stop. My investigation into insurance industry abuses is continuing vigorously and aggressively,” Blumenthal said.
The settlement was reached after Blumenthal’s office uncovered several agreements where HRH secretly steered clients to certain insurers in return for undisclosed commissions. Many of the agreements secretly rewarded HRH for directing personal lines clients – those seeking homeowners and automobile insurance – to HRH’s select group of carriers that included The Hartford, Travelers and CNA.
HRH said it believes the terms of the agreement set a new standard for compliance and disclosure, while maintaining HRH’s agency compensation model, including contingent commissions.
“I firmly believe that this agreement serves the best long-term interests of our associates, clients and shareholders,” said HRH chairman and CEO, Martin L. Vaughan, III. “I also believe this agreement should become the new industry standard by recognizing the distinction between fee-based brokerage business, where we typically get paid by the client and traditional agency business, where we’re normally paid by the underwriter in the form of commissions, while allowing us to maintain our existing agency compensation model, including contingent commissions.”
According to HRH, key provisions under the terms of the agreement include:
* Establishing a national fund of $30 million to be distributed among HRH’s U.S. clients who elect to participate in the fund. No portion of the fund represents a fine or penalty
* Enhancing disclosure practices for brokerage clients
* Enhancing disclosure practices for agency clients
* Establishing a business practices committee of the company’s board of directors
* Retaining the firm’s ability to collect contingent commissions on traditional agency business
* The elimination of contingent commissions on its brokerage business (a reform previously instituted by HRH effective Jan. 1, 2005))
“The agreement serves as a standard for compliance and disclosure and will help us better serve our clients in the future,” said Vaughan. “We appreciate the commitment of the Connecticut State Attorney General’s office to work cooperatively through this process to address questions about our business and industry practices.”
In conjunction with executing the agreement, the company has entered into an order with the Conn. Insurance Commissioner to resolve all issues relating to the insurance department’s investigation. Under this agreement, the company will pay an administrative fine of $250,000 to the insurance department and submit quarterly reports detailing insurance activities of the company’s Connecticut subsidiary.
Cogswell said, “The agreement that was entered into with Hilb Rogal & Hobbs today is significant because of the substantial recovery for both the citizens of Connecticut and for residents of other states. It is an indication of our commitment as regulators to pursue aggressively any available option in order to protect consumers and safeguard their interests from the questionable practices of those who infringe on those rights for their own selfish interest. This settlement sends a strong message that we will fight strenuously to prevent abuses and to preserve not only the rights of consumers, but also the public’s confidence in the insurance industry.”
The company expects to record a third quarter pretax charge of $40 to $50 million, representing the company’s best estimate at this time of the amount to resolve currently pending regulatory matters, including the related legal and administrative costs. The foregoing amount does not include legal or other costs related to private litigation against the company.
The company has scheduled an investment community teleconference for 2:00 PM ET today to review the agreement and its financial implications for the company business.