In his lawsuit last week accusing insurance broker Marsh & McLennan Cos. of civil fraud, New York Attorney General Eliot Spitzer singled out Marsh's Los Angeles office, alleging that brokers provided false insurance quotes, solicited rigged bids, and made lucrative payoff agreements that inflated the price of property and casualty insurance in Southern California.
The complaint, filed last week in state Superior Court in Manhattan, alleges that Marsh's Los Angeles office stationed in a downtown office tower on Figueroa Street collected special payments and forced other insurers to give false or inflated quotes to purposely throw bids to favored insurers, all over a period of several years.
Marsh, the world's largest insurance broker, "steered unsuspecting clients" to insurers from whom it had solicited rigged bids, Spitzer alleged.
A Marsh spokeswoman declined to comment.
Within hours of Spitzer's lawsuit, the repercussions were already being felt. Insurance industry stocks plummeted on Oct. 14, with shares of Marsh falling nearly 25 percent in one day.
Shares of American International Group, where two executives cut a deal with Spitzer to plead guilty in the matter, fell $6.99, or 10.4 percent to $60 a share.
Los Angeles businessman and philanthropist Eli Broad, chairman of AIG SunAmerica Inc., was among the hardest hit, suffering a paper loss of $101.3 million in one day. Broad, who didn't return a call for comment, owns 14.5 million AIG shares, now worth $868 million, according to filings with the Securities and Exchange Commission. He acquired the shares when he sold his financial services company SunAmerica to AIG in 1999.
Insurers Ace Ltd. and Chubb Group were also implicated.
AIG issued a statement announcing it was "saddened" by the news that two of its executives had been arrested and that it would cooperate with Spitzer's investigation.
Garamendi ponders moves
Industry experts said the lawsuit against Marsh would bring a flood of civil litigation against the insurance industry.
California Insurance Commissioner John Garamendi said his department plans to issue new regulations within the next two weeks that would require brokerages to disclose any commissions they receive, and potentially could lead to a banning of the type of commissions in question, called "contingent commissions."
Garamendi said his office has been investigating the same allegations as Spitzer since earlier this year, when the Washington Legal Foundation filed a complaint that was taken up by both men.
When Spitzer decided to pursue a criminal probe, the two investigations parted ways with Garamendi deciding to pursue a civil action. "We will probably cover a great deal more ground than if we had pursued a joint investigation," Garamendi said.
Garamendi plans to file civil litigation related to contingent commissions but he would not say if it would target Marsh or other large brokerages.
"Certainly the allegations that Eliot has made and the criminal convictions he has already achieved through the guilty pleas are very clear indicators of widespread, pernicious and damaging practices that cause unnecessary and significant costs to business consumers," Garamendi said.
In contingent commissions, brokers are paid a fee by insurers separate from advisory fees or a typical commission that a broker receives from a client for finding the best insurer. The precise terms vary but usually are based on how much business the broker's clients place with the insurance company, how many clients renew policies, and the profitability of the business placed by the broker.
For years, insurers have maintained that such payments are a normal part of doing business. But Spitzer, in his lawsuit, said insurance carriers "pass the costs of contingent commissions directly to their clients in the form of higher premiums."
The practice, the lawsuit said, "touches virtually every line of insurance." It also allegedly caused Marsh to hire and fire employees based on their ability to bring in higher fees. Marsh collected about $800 million in contingent commissions in 2003, which contributed to its reported $1.54 billion of net income last year.
"It's a kickback scheme that undercuts the conduct of the market. They are not working on behalf of clients," said Doug Heller, a consumer advocate at the Foundation for Taxpayer and Consumer Rights.
In July, United Policyholders, a San Francisco-based insurance consumer rights group, filed three class-action lawsuits in Los Angeles Superior Court against Marsh and two other insurers, Aon Corp. and Willis Group Holdings Ltd., seeking disclosure of the amount of their contingent commissions.
Those lawsuits claim the commissions are a breach of fiduciary duty to clients because brokerages are rewarded based on the profitability, growth and volume of business placed with individual carriers.
"When a broker represents themselves as being on the side of the client, there is a certain expectation they will not be steering you to a product that is not the best insurance," said Amy Bach, United Policyholders' executive director. She expects other states will begin filing their own lawsuits against big insurers.
Downtown office singled out
According to Spitzer's lawsuit, Marsh's Los Angeles office is a hotbed of illegal activity.
The suit alleges that officials of Marsh asked Hartford Insurance officials, who share their building, 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.
"Marsh often provided Hartford with a spreadsheet showing the accounts for which it wanted Hartford to provide a losing quote or indication, along with other insurers' quotes," the suit alleges. "It instructed Hartford to quote some percentage, typically 25 percent, above the other insurers' quotes on the spreadsheet to ensure that Hartford would not get the business."
Hartford provided the inflated quotes, the suit continues, which were referred to as "throwaway quotes."
On larger policies above $1 million in annual premiums, Marsh asked for similar inflated quotes, the lawsuit alleges. "Hartford provided these quotes and indications because Marsh was its biggest broker, and it felt that Marsh would limit its business opportunities if it refused," the suit said.
Bloomberg News contributed to this story.
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