Fla. Investigation: Brown & Brown Says It Carefully Monitors Brokers

November 10, 2004

Brown & Brown Inc. is confident that twin investigations of the insurance industry by Florida officials will reveal no wrongdoing by the Daytona Beach-based company or its brokers, its president says.

Jim Henderson, Brown & Brown’s president and chief operating officer, said the nation’s eighth-largest insurance brokerage does not rig bids when offering its corporate customers a choice of coverage and routinely tells its clients about the commissions it receives from insurers for selling their policies.

Henderson said the company carefully monitors its nationwide network of brokers to ensure that their actions are scrupulous.

“Do I know what every one of our 4,200 people do every day? No,” he said during an interview. “But we feel confident with our systems. We check constantly.”

Florida Attorney General Charlie Crist subpoenaed 10 insurance brokerages last week, including Brown & Brown, as part of an investigation into whether the brokerages — which often serve as middlemen for insurance companies and businesses seeking insurance coverage — are guilty of bid-rigging or taking kickbacks to boost their income. He said he intends to subpoena a half-dozen insurance companies as well.

Crist announced the subpoenas Friday, one day after Florida’s chief financial officer, Tom Gallagher, said he was organizing a task force to examine the same industry practices.

New York’s high-profile attorney general, Eliot Spitzer, was the first to begin probing the industry with an investigation last month targeting the nation’s two biggest insurance brokerages, Marsh & McLennan and Aon Corp. Together the two companies control 70 percent of all the commercial insurance sold through brokerages in this country.

Gallagher issued a subpoena Tuesday to Marsh & McLennan regarding the purchase of property insurance for coverage of state-owned buildings in Florida.

Spitzer’s investigation in New York has already resulted in the resignation of Marsh & McLennan’s chairman and chief executive officer and two top executives at Marsh Inc., the company’s insurance-brokerage unit. Although New York is Brown & Brown’s third-largest territory in terms of the number of outstanding policies it has sold there, Spitzer has not identified the company as one of those being investigated, Henderson noted.

“We have no inquiry by New York state in any manner,” he said.

Spitzer contends that some Marsh & McLennan brokers colluded with insurance companies to rig the bids that they presented to their corporate clients. Some of the insurance companies submitted artificially high bids, he contends, so that the lowest bid seemed more attractive than it really was — with the understanding that a different insurer got to submit the lower bid each time.

Brown & Brown brokers “categorically do not do that,” Henderson said.

Spitzer also alleges that Marsh and other brokerages were paid commissions by insurers even as they received fees from their corporate clients for their services. And certain of those payments — known as “contingency commissions” — were often not disclosed to the brokerages’ clients, Spitzer said, even though they may have influenced brokers to steer their customers to insurers paying the highest fees rather than those offering the best deals.

According to Henderson, Brown & Brown is organized differently than brokerage giants such as Marsh and Aon and doesn’t have the same problem with commissions.

The majority of Marsh’s and Aon’s business is channeled through central offices, he said, giving those brokerages a good deal of leverage in dealing with insurance companies seeking to do business with their customers, many of whom also pay the brokerages a fee to get them the best deals and provide expert advice.

Brown & Brown, by contrast, is a decentralized network of semi-autonomous insurance agencies operating in 30 states. Because each agency must compete locally for business clients against small, independent brokers, Brown & Brown brokers are rarely paid by their customers, Henderson said. Instead, the company’s brokers earn the majority of their revenue in the form of commissions from the insurance companies whose products they sell, he said.

But you shouldn’t put too fine a point on whether the insurer or the customer pays the brokerage, said William Feldhaus, a professor of risk management and insurance at Georgia State University.

Feldhaus said large, centralized brokerages such as Marsh do negotiate separate fees with their corporate clients — something that smaller, decentralized brokerages such as Brown & Brown don’t do.

But the decentralized brokerages still take a cut of the insurance premiums that their clients send to their insurance companies, Feldhaus said.

“You can argue the semantics of who pays whom, but essentially the buyer pays,” he said.

In any case, Spitzer, Crist and other state attorneys general are specifically concerned about contingency commissions, which are bonuses paid by insurers to brokerages for driving a certain amount of business their way, Feldhaus said. And nearly all brokerages accept contingency commissions, he said.

Henderson said that Brown & Brown began disclosing the existence of such contingency commissions to its business clients a few years ago.

He said the company in recent days has fielded some calls from clients concerned about Crist’s investigation.

“We’re personally offended that these things happen and you get questions of the industry, when it [the investigation] should be addressing the actions of a few,” Henderson said.

“Corporate scandals have become unfortunately too routine,” he added. “But we’ll be fine. We feel very good about our situation.”

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