Plaintiffs in a class action suit against commercial insurers and brokers for alleged bid rigging and account steering have failed to show that the defendants’ actions amounted to fraud under federal racketeering statutes or violated federal antitrust laws, a federal judge in New Jersey has ruled in dismissing the charges.
Judge Garrett E. Brown Jr. in U.S. District Court in Newark, N.J., found that the plaintiffs failed to support their assertions that insurers and brokers conspired to suppress competition and fraudulently sell insurance and benefits by agreeing on certain bid-rigging, account steering and contingent commission arrangements.
The judge did, however, give plaintiffs one more shot, granting them a 30 day window to come back with an amended case addressing his concerns.
In addition to dismissing the conspiracy charges, the ruling points out that contingent commissions paid to brokers are not illegal or anticompetitive. It also freed a major commercial insurance broker organizaton of assertions that it facilitated illegal activity.
Brown’s dismissal of the federal charges came in two separate but related rulings, one on charges made under the Racketeering Influence and Corrupt Organization Act (RICO) and other on charges made under federal Sherman Antitrust Act.
The rulings involved consolidated cases brought by employees of companies that bought employee benefits from MetLife and other insurers through various large insurance brokers, including Marsh & McLennan, Seabury & Smith and Aon, and employees whose companies purchased property/casualty insurance from AIG, Chubb, Fireman’s Fund, XL Insurance, Berkshire Hathaway and other insurers through Marsh, Aon, Willis, Brown & Brown and others.
The class action suits were filed in 2005 after then-New York Attorney General Eliot Spitzer and other attorneys general and insurance regulators began investigating charges of bid rigging, account steering and insurers’ payment of contingent commissions to brokers.
To prove their allegations of federal antitrust violations, plaintiffs had to show that an implied or express agreement existed between the brokers and insurers to allocate customers and curtail competition.
Plaintiffs alleged that there were classic “hub and spoke” conspiracies in play, with brokers being the hub and insurers being the spokes, serving as strategic partners in agreeing to bid-rigging and account steering.
According to the plaintiffs, the alleged conspiracies have their roots in the early-to-mid 1990’s decisions by each broker defendant, beginning with Marsh, to consolidate their markets or “funnel the bulk of their business to a selected number of preferred insurers.”
The complaints alleged the existence of a series of “separate but parallel” conspiracies, each involving a defendant broker and the insurance companies with which that broker had contingent commission agreements.
Plaintiffs alleged that brokers communicated this strategy to their carriers and that the carriers knew which other carriers were involved and what contingent commission agreements were in place.
Plaintiffs claimed that brokers were ringleaders but the court said it wasn’t clear that the insurers themselves were collaborating in any scheme or had any agreed-upon method for divvying-up accounts.
“Plaintiffs allege that defendants utilized legitimate practices, such as contingent commissions, to facilitate an anticompetitive and exclusionary scheme. However, the scheme that plaintiffs allege is not apparent,” the judge wrote.
The court found no proof of how markets or customers were divided among insurers in the alleged scheme. Plaintiffs claimed there were documents describing insurers’ understanding of the amount of business that CNA, St. Paul/Travelers and The Hartford would share but defendants said these forms did not show any agreement to refrain from competing with each other.
Just because insurers paid a brokers higher commissions to receive more of their business, that does not mean a conspiracy to allocate market and restrain competition existed, the court ruled.
The court further found that while such a conspiracy might be plausible based on the plaintiffs’ allegations, there would only be violation of antirust laws if the underlying behavior was itself illegal, which plaintiffs failed to show. Contingent commission agreements by themselves are not illegal or anticompetitive, the court noted.
“[I]t appears that the communications among the competitor insurers and the mechanisms in place to exchange information and police the alleged conspiracy, could have made this relationship plausible when viewing the facts as true. However, while it might have been plausible that the defendants agreed to engage in some sort of behavior, it cannot survive as a horizontal conspiracy unless what the competitors agreed to do was ‘unlawful,'” Judge Brown wrote.
“The court is not satisfied that plaintiffs have set forth sufficient allegations that the conduct alleged, i.e., the consolidation of the insurance markets and the steering of certain customers based on contingent commission payments, constitutes a per se illegal horizontal customer or market allocation scheme,” he added.
In their racketeering complaint, plaintiffs tried to show that membership of all of the brokers in the commercial insurance broker organization, The Council of Insurance Agents and Brokers, was proof of a conspiracy. CIAB members place the majority of commercial insurance in the country.
However, Judge Brown rejected the allegation that CIAB is an enterprise that engages in racketeering. While CIAB provides its members with networking opportunities and communications tools, Judge Brown ruled that plaintiffs “failed to assert any fact indicating the presence of a nexus” between CIAB and defendants’ alleged fraudulent activity.
The plaintiffs failed to prove that the brokers and insurers, as well as the remainder of the insurance industry, acted as a single unit, despite their membership in CIAB, shared industry relationships and use of similar operating models. Such similarities do not assert a RICO enterprise but merely show the brokers and insurers are members of the insurance industry, the court said.
“The presence of such similarities does not preclude a competition among these entities for their share of the market, but the presence of such competition precludes a finding of a RICO enterprise,” the opinion states.
In rejecting assertions that defendants had the necessary structure, industry relationships and strategic partnerships to commit fraud, Judge Brown at one point wrote, “These allegations mix apples and oranges, and many other fruits as well.”
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