Numerous clients of Marsh & McLennan Cos.' Los Angeles office, which was directly implicated in the insurance brokerage's bid rigging scandal, were reacting last week with concern about being the victims of possible illegal and unethical practices.

The clients, ranging from small businesses to universities to larger public companies, were demanding an accounting of the commissions paid to the firm and in some cases retaining attorneys. A few were already shopping around for new brokers.

Local Marsh brokers, meanwhile, have been contacting clients and opening their books in an effort to retain business.

"We are trying to get up to speed on what happened, and see how it affects us. Marsh was very up-front in calling us and letting us know there was an issue out there, but I don't think we have put this to rest by any means," said Robert Sprowls, chief financial officer of Southern California Water Co. in San Dimas. The American States Water Co. unit has all its employee benefit and property and casualty insurance brokered by Marsh.

The response by clients came as Marsh's board cleaned house as it sought to avoid criminal charges. Chief Executive Jeffrey Greenberg resigned, a former assistant U.S. attorney general was named to the CEO spot and broad reforms were announced.

Those reforms included a pledge to end all so-called contingent commissions, to make all of the company's fees transparent to customers and to make whole any clients who suffered from their practices even as the new management team contended that the vast majority of clients did not.

Maintaining stability within Marsh's client base is considered critical because the business is so relationship-driven. A common theme heard last week was how quickly accounting firm Arthur Andersen imploded after its was implicated in the Enron scandal. Any precipitous loss of clients could leave the brokerage vulnerable.

Marsh's rapid response to the crisis wasn't fast enough for some Los Angeles area clients, with a rival brokerage reporting inquiries from Marsh clients.

"I think the larger clients are infuriated, and while our phone is not ringing off the hook I think they are starting to call around," said a rival broker, who declined to be identified.

In his Oct. 14 lawsuit, Spitzer accused Marsh of rigging insurance bids in order to glean the maximum possible contingent commissions from insurers. Contingent commissions are fees insurers have been paying to brokers, similar to a bonus, as a reward for steering business toward the insurer.

Varied clients

Among the clients with concerns last week was Mount St. Mary's College, which pays $1.6 million in annual premiums for an employee benefits package brokered by the local Marsh office.

The Los Angeles liberal arts college has been a client of Marsh since 1997 when the brokerage, the largest in the world, acquired the Johnson & Higgins brokerage. The college contacted Marsh last week to see if its policy has been affected by the alleged wrongdoing and if it had paid too much. It also was considering getting a new broker.

"We are following things and seeing about all these premiums being inflated, and we have concerns," said Chris McAlary, the college's vice president of administration and finance. "A $1.6 million premium it's a lot of money. We are a small liberal arts college. We have to follow the case closely and determine if we want to shop this out."

The issue of bid rigging is especially pertinent to Los Angeles clients of Marsh, given the allegations laid out in the Spitzer complaint. The lawsuit alleges that Hartford Insurance officials, who have offices in the same Figueroa Street building as Marsh, were asked for inflated quotes "on virtually a daily basis" since 2000 to give the impression of competitive bidding on property and casualty policies with annual premiums up to $1 million.

Michael G. Cherkasky, Marsh's new chief executive, maintained in a conference call last week that any wrongdoing involving rigged bids was conducted by a handful of employees. Cherkasky maintains that the vast majority of Marsh clients likely got the cheapest insurance possible given its power in the marketplace, even with contingent commissions.

Siri Gadbois, president of the Chicago-based Education and Institutional Insurance Administrators, said she wasn't convinced.

"We have been well aware that contingent commissions have been in existence with even the smallest brokers. What we don't know is the magnitude. We will be seeking that information from Marsh," she said.

The consortium oversees property and casualty coverage for 100 Christian-based higher education institutions, including California Lutheran University in Thousand Oaks. Gadbois estimates that Marsh brokers $25 million in annual insurance policies for the consortium. It plans to explore bidding out for new brokerage services, although it has not ruled out continuing with Marsh, she said.

Possible legal action

If allegations of bid-rigging prove to be true, the degree of losses suffered by individual clients could reach into the tens of thousands of dollars. (Contingency commissions contributed $845 million to Marsh's revenues in 2003 and half its estimated earnings.) Several local firms have already hired legal representation in their dealing with Marsh as they figure out if they have overpaid for their insurance and their legal recourse.

Ty Childress, a partner at Howrey Simon Arnold & White LLP, is advising large public company clients on potential damage claims against Marsh.

As a first step, he and other attorneys at the firm have been telling some clients to go back to their Marsh brokers to determine the amount of the contingent commissions. If they believe they paid too much, the clients plan to ask for a refund. If that doesn't work, the other option is a lawsuit alleging breach of contract, unjust enrichment and possibly RICO claims.

He said none of the brokerage contracts he has seen include provisions for arbitration or any other form of alternative dispute resolution.

"The issue is how much disclosure was made to policyholders," said Childress, who is based in Los Angeles. "If these contingent commissions often were not disclosed to policyholders that's clearly a conflict of interest."

If the client suspects there was bid-rigging involved in the insurance bid, there also could be a legal claim against the carrier, though it could be difficult to determine damages, he said.

Daina Petronis, the spokeswoman for Marsh's Los Angeles office, said local brokers were working hard to retain business, and she maintained that any problems were "isolated incidents" that affected few customers.

"We are communicating with our clients. We are indeed willing to go over any program and policy we have to assure them everything was done appropriately," Petronis said.

A number of clients have been willing to give Marsh the benefit of the doubt. Some are revising their retention agreements with Marsh while others seem content with their brokers, Childress said.

"The major issue here is for Marsh to rebuild trust and integrity with clients. If they are able to reassure their policy holder clients they might be able to minimize these concerns," he said.

Among clients so far sticking with Marsh is the U.S. Telepacific Corp., a Los Angeles-based firm that provides a broad array of communication services to businesses.

John Hodgson, the company's executive vice president of human resources, said that while he was concerned about the situation, he wasn't about to start a major review of his brokerage relationship.

"If they were found to do anything inappropriate we would expect a refund of our premium, but we are going to stay with Marsh until they are proven guilty," he said.

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