The contingent commissions that are at the center of the Marsh & McLennan Cos. scandal were the subject of two lawsuits filed three years ago in California.

The suits, both filed on behalf of the public by New York law firm Anderson Kill & Olick, allege that Marsh & McLennan and other insurance brokers took kickbacks and undisclosed fees to steer business to large insurers allegations that were later made by New York Attorney General Eliot Spitzer.

Both lawsuits one filed in Superior Court in Los Angeles, the other in San Francisco claim that Marsh engaged in unfair competition and unjust enrichment in violation of California's Business and Professions Code.

Neither of the lawsuits allege bid-rigging or price fixing similar to those that arose from Spitzer's probe.

The San Francisco civil lawsuit, which appears headed for trial, alleges that a group of insurers including Allianz AG, American International Group, CNA Financial Corp.'s Continental Casualty Co. unit, Chubb Corp. and Hartford Financial Services Group all made undisclosed payments to insurance brokers, including Marsh, for steering customers to them.

"Such undisclosed fees and commissions constitute undisclosed kickbacks," the lawsuit states. "The defendants' practice of holding themselves out as representatives of their policyholder clients while secretly receiving substantial commissions constitutes unfair competition."

Finley Harckham, a partner at Anderson Kill, said the insurance industry is trying to portray contingent commissions as an acceptable practice that has been in place for a long time.

The central issue, he said, is whether there is sufficient disclosure. There has been debate on the subject since 1999, when the Risk and Insurance Management Association, an industry group, called for full disclosure of the practice to policyholders, he said. Not all companies did so, he said.

Spitzer's lawsuit against Marsh alleges that contingent commissions, which are sometimes referred to as "placement services agreements," create a financial incentive for brokers and violate their fiduciary responsibility to policyholders.

"This really has to do with the insurance practices of brokers that are selling to small businesses," Harckham said, adding that without getting competitive quotes, businesses may be overcharged or may miss out on buying less expensive coverage.

The Los Angeles lawsuit, also filed in 2001, sheds light on the brokers' practice of earning interest by investing premiums for periods of 30, 45 or 60 days before forwarding the premiums onto insurers. The suit alleges that this "constitutes unauthorized self-dealing by agents and fiduciaries at the expense of policyholders."

That suit alleges that brokers "insert themselves into the payment process in order to hold and invest for their own accounts the funds being transferred."

The lawsuit claims that Marsh and Aon Corp. generated more than $100 million per year in interest from their investment of claims payments and return premium payments.

A judge dismissed the Los Angeles lawsuit in February. Harckham said it is being appealed.

For reprint and licensing requests for this article, CLICK HERE.