Calif. Regulator Reaches Settlement with Marsh to End Secret Commissions

March 13, 2006

California’s Department of Insurance (CDI) has reached an agreement with Marsh & McLennan Companies Inc. requiring the giant broker to fully disclose commission agreements and put a halt to harmful practices such as bid rigging.

The deal follows a lengthy investigation by CDI in which multiple instances of improper practices by the broker were uncovered. Importantly, the settlement requires Marsh’s ongoing cooperation as the state’s commissioner continues to investigate questionable practices in the brokerage and insurance industries.

“This settlement is another step in our effort to clean up this industry and end secret commissions, bid rigging, and other actions that are harmful to consumers,” said Commissioner John Garamendi. “Brokers have a clear duty to work on behalf of their clients, and not engage in secret, backroom deals.”

The Department’s Decision and Order states that “all agents and brokers owe duties to their principals, including loyalty, honesty, integrity, good faith, avoiding self-dealing, and full disclosure.” The Department’s Accusation outlines several schemes used by former Marsh employees to benefit the company at the expense of its clients. Those former Marsh employees would direct insurers to submit false, fictitious, or inflated bids to help the broker maintain current business and/or keep its prices high. For example, a Marsh broker might ask an insurer to submit a quote. Rather than seeking the best quote, the Marsh broker specified an amount designed to help Marsh retain its current policyholder at the desired rate or higher. Marsh neither admitted nor denied the allegations in the Department’s Accusation or the findings in the Department’s Decision and Order, according to CDI.

In a related case, Marsh and its subsidiaries reached a settlement agreement with New York in January 2005, requiring it to pay $850 million into a fund to be distributed to policyholders affected by secret commissions. Approximately $100 million will go to California policyholders, the payment and distribution of which will be monitored by the CDI.

The CDI settlement mirrors much of the New York agreement, and the Commissioner has the authority to enforce that agreement’s provisions. Provisions in the California agreement include:
• Marsh must disclose to clients in “plain, unambiguous” written language the commissions, and terms of the commissions, that it receives;
• Marsh may not knowingly accept a “false, fictitious, or inflated” quote, or solicit such a quote from an insurer;
• Marsh must implement standards of conduct regarding compensation from insurers consistent with the terms of the settlement. Notably, it may not “place its own financial interest ahead of its clients’ interests in determining the best available insurance product or service;” and
• Marsh must establish a Compliance Committee of the Board of Directors to monitor the company’s compliance with the standards of conduct regarding compensation from insurers

The Department began its investigation of the broker and insurance industries in early 2004. In November of that year Garamendi sued San Diego broker Universal Life Resources and four insurers, accusing them of hiding millions of dollars collected through secret commission deals. A resulting settlement with ULR forced the broker to immediately end such practices – the legal case against the participating insurers is still pending.

A copy of the settlement agreement is available on the Department Web site at www.insurance.ca.gov.

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