Liberty Mutual Opts to Fight, Not Settle, Charges Over Contingent Commissions, Account Steering

May 7, 2006

Unlike American International Group, Zurich, ACE and other insurers that have settled similar charges, Liberty Mutual Insurance Group has decided to fight allegations of anti-competitive practices that have been brought against it by the attorneys general of New York and Connecticut.

The Boston-based insurer is insisting that charges regarding improper commissions and bid-rigging are untrue and overblown and says it is willing to go to court to defend itself and its practices rather than settle with the two states.

After two years of negotiations, Liberty Mutual said it has been unable to reach a resolution and believes the states’ settlement demands have been excessive.

“We have tried to reach resolution and can only describe their settlement demands as excessive and unreasonable: both in terms of magnitude and in their demands that we change legitimate business practices in states outside their legal jurisdictions,” the company said in a statement.

“We have declined these demands and are preparing to resolve the issues in court,” the statement added.

The insurer took its stand following the filing of complaints by the offices of New York Attorney General Eliot Spitzer and Connecticut Attorney General Richard Blumenthal involving bid-rigging and commission payments.

The complaints describe alleged cooperation of Liberty Mutual employees in a bid-rigging scheme in which the employees provided large insurance broker Marsh with so-called “B” quotes for excess casualty accounts. The quotes were intentionally less favorable than other insurers’ quotes.

In August 2005, a former Liberty Mutual executive, Kevin Bott, pled guilty to criminal charges in connection with big-rigging conduct while employed at Liberty Mutual.

The complaints also find fault with Liberty Mutual for paying contingent commissions — or what the attorneys general call “kickbacks” and “payoffs” — to insurance brokers and independent agents to encourage them to place more business with Liberty Mutual.

“Brokers and agents responded to these incentives, steering their clients to Liberty Mutual and in many cases violating their fiduciary duty to assist their clients in finding the best insurance for the lowest price,” according to Spitzer.

“It is simply appalling that a major financial institution would rig bids and induce brokers and agents to abuse their position of trust with the insurance-buying public,” Spitzer added.

According to Blumenthal, since at least the mid-1990s, Liberty Mutual has paid tens of millions of dollars in so-called contingent commissions to insurance brokers like Marsh, Aon Corporation, Willis Group Holding Ltd., and Arthur J. Gallagher & Co. In exchange, brokers agreed to “steer contracts to Liberty Mutual,” he said.

Blumenthal said Liberty Mutual’s “anti-competitive conspiracies” violate the Connecticut Unfair Trade Practices Act, as well as the Connecticut Antitrust Act.

“Consumers and our entire state economy suffered from Liberty Mutual’s scheme to skew the insurance market through bid rigging and surreptitious kickbacks,” Blumenthal said.

Liberty Mutual is prepared to defend its contingent commission practices.

“Allegations of wrongdoing regarding commission payments and reinsurance brokering are incorrect. Liberty Mutual’s conduct in both areas was appropriate and lawful,” the company stated.

As for the bid-rigging charges, Liberty Mutual has not denied that former employees engaged in bid-rigging but insists it is not a common company practice as alleged.

“Unfortunately, two former lower level employees seriously violated our trust and our standards of conduct in their quotation activity. One employee left in 2001 and the other resigned in the course of our investigation in 2005. Liberty Mutual has a culture not just of compliance, but of ‘doing the right thing,'” the insurer said.

In pressing similar cases against other insurers including Zurich, ACE and American International Group since 2004, Spitzer, Blumenthal and several other states’ officials obtained settlements worth billions of dollars. A number of those settlements have also required the insurers to alter their commission payment practices, with effects felt in other states.

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