The St. Paul Travelers Companies Inc. has entered into a $77 million settlement with the attorneys general of New York, Connecticut and Illinois, as well as with the New York State Department of Insurance, resolving issues relating to those states’ industry-wide investigations into producer compensation, insurance placement practices and finite reinsurance products.
St. Paul Travelers said it did not admit to any violation of federal or state law as part of the settlement. However the company did issue an apology, according to the state officials.
Under the terms of the settlement, the company agreed to, among other things:
— pay $37 million into a fund for certain excess casualty policyholders and pay $40 million in fines;
— enhance the company’s disclosures regarding its producer compensation practices;
— strengthen its ongoing training and education of employees;
— discontinue paying contingent commissions on excess casualty coverage in the United States through 2008; and
— discontinue paying contingent commissions on any line of business if 65 percent of the United States market for that line does not pay such commissions or has signed similar settlement agreements.
“Conducting our business according to the highest standards of integrity has been, and will continue to be, of paramount importance to all of us at St. Paul Travelers,” said Jay Fishman, chairman and chief executive officer. “We are committed to continuing to embrace changes to our business practices that are consistent with that objective. We have already taken significant steps toward strengthening the ongoing training and education of our employees. Through this settlement, we will implement additional measures to further the overall goal of increased transparency in the marketplace.”
The insurer said that the cost of the settlement has already been funded by the company’s $42 million legal provision that was recorded in the second quarter of 2006, along with additional amounts that had previously been recorded.
Attorney General Eliot Spitzer and State Insurance Department Superintendent Howard Mills today announced the agreement. Connecticut Attorney General Richard Blumenthal and Illinois Attorney General Lisa Madigan also joined in the settlement.
Spitzer said that in addition to the monetyary settlement, St. Paul Travelers has issued an apology acknowledging its improper conduct.
“St. Paul Travelers has joined the growing number of insurers, brokers and agents who have pledged to make the market for insurance coverage more transparent and competitive,” Spitzer said. “This development will benefit all consumers, from individuals buying car insurance to small businesses to large corporations.”
State Insurance Superintendent Howard Mills said: “St. Paul Travelers is now reforming its business so that consumers are given access to more information about their insurance transactions while at the same time compensating policyholders who were economically harmed by their past conduct. Both initiatives are welcome news for all those involved in the property casualty insurance market.”
The investigation found that St. Paul Travelers made undisclosed payments to insurance brokers and agents in exchange for business referrals, and participated in a scheme to fix insurance prices in the excess casualty area.
For example, the assurance cites an e-mail from a broker at Marsh & McLennan Companies to a St. Paul underwriter seeking a phony bid for an insurance contract that was being steered to one of St. Paul ‘s competitors, Zurich:
“Specs were forwarded in November for [Client C]. Zurich’s renewal quote is $175,000 for [the lead excess layer]. Primary AL is $2MM. Josh is asking for non-quotes. If you didn’t already respond to [the Marsh executive] . . ., please feel free either to decline for class or quote higher (please).”
The next day St. Paul responded by issuing a quote 30 percent higher than Zurich’s bid.
Spitzer said the documents also detail St. Paul’s use of improper “finite reinsurance” to bolster both its own financial results and those of its clients. For example, in the years 1999 through 2002, St. Paul entered into aggregate excess of loss reinsurance contracts with an insurer in Barbados, despite a side agreement that any losses suffered by the insurer would be made up by St. Paul.
While not admitting to any violations of law, St. Paul did issue an apology, according to Spitzer. In that apology, St. Paul Travelers said: “St. Paul Travelers acknowledges that certain of its employees violated acceptable business practices and St. Paul Travelers’ own standards of conduct by engaging in improper bidding practices and certain “finite insurance” activities. St. Paul Travelers apologizes and has enacted business practice reforms to ensure that these incidents do not occur again. Further, St. Paul Travelers has agreed to support legislation eliminating contingent compensation for brokers and agents.”
Under today’s agreement, $37 million will be paid to St. Paul Travelers policyholders harmed by the company’s bid-rigging activities. In addition, St. Paul Travelers will pay penalties of $24 million to New York and $8 million each to Connecticut and Illinois.
In the fall of 2004, the New York Attorney General’s office and the New York Insurance Department announced a joint probe of misconduct in the insurance industry. This investigation has resulted to date in guilty pleas from 20 insurance company executives and officers, and the recovery of approximately $3 billion for consumers and workers compensation plans.
Sources: St. Paul Travelers, New York Attorney General
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