Marsh & McLennan Cos., the world’s largest insurance broker, has been sued by New York Attorney General Eliot Spitzer based on allegations that Marsh steered clients to favored insurance companies and worked with major insurers to rig the bidding process for property-casualty insurance coverage. The civil complaint alleges that Marsh cut deals with insurers such as American International Group Inc., Ace Ltd. and others. In certain instances, it is alleged that Marsh singled out one insurer to receive business while urging others to enter high bids. Spitzer has secured guilty pleas on criminal charges against an AIG executive and an Ace executive for their roles in the alleged scheme.
The complaint against Marsh also accuses the company of steering clients to insurers that agreed to pay additional commissions, or contingent commissions, above and beyond those paid by the client. Spitzer alleges that these undisclosed arrangements, known as market service agreements or placement service agreements, represented a breach of duty to Marsh’s clients. Marsh reported that it received $845 million in such fees in 2003, but it recently stopped collecting the fees in the face of Spitzer’s scrutiny. The company said that the fees accounted for 12% of its $6.9 billion risk and insurance-services revenue and 7% of the company’s $11.6 billion overall revenue last year.
Spitzer continues to scour the insurance industry, and is probing the second-largest U.S. insurance broker, Aon Corp. Spitzer has expanded his investigations into fees paid to insurance brokers by issuing subpoenas to life, health and disability insurers, including Cigna Corp., Aetna Inc., MetLife Inc., and UnumProvident Corp. These recent subpoenas request information on communications and payments with brokers.
Meanwhile, Connecticut Attorney General Richard Blumenthal issued at least 20 subpoenas to unnamed insurance companies and brokers. Blumenthal said the focus of the investigation is on bid-rigging and price-fixing.
The law firm of Lerach Coughlin Stoia Gellar Rudman & Robbins LLP, which specializes in class actions, has been hired by California’s Insurance Commissioner, John Garamendi, to bring suit against brokers and insurers over bid-rigging and price fixing. The lawsuits are expected to focus on brokers and insurers who deal in employee benefits such as group life and disability coverage as well as property casualty insurance purchased by corporations. In addition, Garamendi unveiled new California regulations intended to clarify and strengthen existing rules governing agents and brokers who operate in the state.
On October 14, 2004, Lerach Coughlin, on behalf of United Policyholders, a policyholders’ organization, filed a civil action against Universal Life Resources, Inc., an insurance broker specializing in employee benefit plans offering life, accidental death and disability insurance, and various insurance companies, including MetLife, Prudential, Inc. and CIGNA Corporation. The action was filed under California’s "public attorney general" statute, which allows virtually anyone to file a lawsuit on the public’s behalf. Universal Life Resources allegedly breached its duty to clients by failing to disclose contingent commissions and to act in the best interests of its employer clients. It is also alleged that employees unwittingly paid higher premiums for supplemental life and long-term disability insurance because of fees collected by Universal Life Resources from insurers.
In August, United Policyholders brought a lawsuit against Marsh and another against Willis Group Holdings Ltd., the nation’s third largest insurance broker, accusing them of collecting hidden or poorly disclosed commissions from insurers. These suits were also brought under California’s "private attorney general" law. In July, a similar suit against Aon in state court in Chicago was granted class-action status.
This article does not constitute legal or other professional advice or services by JORDEN BURT LLP and/or its attorneys.
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