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Thursday, Mar 28, 2024
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IN THE MARSH



Now for the fallout.

Insurance brokerages in Orange County and across the state face new regulations next year as a result of New York Attorney General Eliot Spitzer’s lawsuit against Marsh & McLennan Cos.

The case, which already has brought changes at New York-based Marsh, the nation’s largest insurance brokerage, could have other impacts here.

California Attorney General Bill Lockyer late last month launched his own investigation into possible bid-rigging and other anti-competitive activities, echoing Spitzer’s allegations.

Lockyer is working with state Insurance Commissioner John Garamendi on a probe into commission payments from insurers to brokerages.

Meanwhile, Garamendi late last month proposed new rules that would require more detailed disclosure of commissions and penalties for brokers who shortchange policyholders in favor of commissions.

“We expect to be filing lawsuits in the near future,” Garamendi said. “We started investigations in February, and we also issued regulations that should move forward within the next couple of months.”

Garamendi is casting a wide net, saying his investigation will focus on nearly every player in the insurance industry, from “mom-and-pop” brokers, to major insurance distributors, to the insurers themselves.

The commissioner’s proposed regulations would require insurance agents and brokers to disclose any financial incentives they would receive for steering business to specific companies.

The new rules have to be approved by the state’s Office of Administrative Law and could be in place by January or February.

Failure to comply with the regulations could bring fines of up to $10,000 per incident, issuance of a cease and desist order and possible revocation or suspension of a broker’s license.

The investigations by Garamendi, Lockyer and Spitzer claim that Marsh and other brokerages have been soliciting kickbacks from insurance companies to steer clients, mostly businesses, to them.

Officials at Marsh declined to comment on whether the company’s OC operations are part of any investigation.

The company reportedly is undertaking an internal investigation of its Los Angeles office after a report that brokers in that office were ordered to stop selling personal coverage lines from one insurer because doing so would have reduced Marsh’s commissions.

Chicago-based Aon Corp., a major Marsh competitor, late last month ran full-page ads in several national newspapers saying that it was “eliminating the practice of accepting contingent commission payments from insurance companies.”

Aon said it was doing so to avoid “even the appearance of a conflict of interest.”

Aon officials declined to comment on whether the company’s OC operations are part of any investigation.

Representatives of Lockyer and Garamendi told the Business Journal they couldn’t comment on specific targets of their probes.

Daniel Callahan, managing partner at Santa Ana law firm Callahan & Blaine, which handles business litigation and insurance bad faith, said he believes the investigations into practices at insurance brokers are overdue.

“It is something that should be addressed,” he said. “Brokers are supposed to represent the insured, and they are in a compromised position if they are getting secret paybacks from the insurance company.”

The state Legislature could get involved, Callahan said, passing a bill to ban secret payments.

The scandal already has brought big changes at Marsh, including the company’s tapping of former prosecutor Michael Cherkasky as its new chief executive.

But don’t look for an Arthur Andersen-style meltdown, said Duke Wahlquist, an insurance coverage litigation partner at Costa Mesa law firm Rutan & Tucker LLP.

“With an accounting firm, everybody understands the idea of public trust that goes into being a public accountant,” he said. “I’m not sure that anybody has ever had such a view of the insurance brokerage business. Incentive payments are more or less an open secret. Those issues have been front-page news on industry publications for years.”

Still, some of the allegations raised eyebrows, Wahlquist said.

“That they were (alleged to have provided) false quotes surprises me,” he said.

For the most part, regulation of insurance brokers falls to the states, Wahlquist said. In Marsh’s case, the Securities and Exchange Commission could get involved since Marsh is publicly traded.

How new regulations impact brokerages here could come down to their size and what their practices are now.

“We don’t have the potential to do what Marsh did,” said Stanley Tutton, president of Santa Ana insurance broker Tutton Insurance Services Inc. “They’re doing really large accounts and they play on a different level than we do.”

Tutton’s company works with midsize companies and often has to engage in competitive bidding with multiple bidders, he said.

“When people bring in competitive bids, they bring in three different brokers in some instances,” Tutton said.

Even so, there could be some negative fallout in terms of perception for brokerages, he said.

“It’s a big black eye for the insurance industry, because everybody sees us as the same,” Tutton said. “But the market works in different ways depending on the size of the accounts you’re working on.”

Others say they already are doing what proposed regulations would mandate.

“We don’t see any new regulations changing anything from our perspective,” said Wade Olson, chief executive of Irvine insurance broker Precept. “We already have a service and compensation agreement with each client so we identify what insurance charges are for and what compensation levels are for.”

Olson said he sees an upside to the regulations.

“That kind of consistency would help clients understand better what they’re paying for and what they really should be paying for,” he said.

For others, Marsh’s woes could be their gain.

Steven Berg-Hansen, president of Irvine-based Complete Insurance Inc., said he’s looking at pitching some accounts held by Marsh because of the uncertainty created by the probe.

“It’s something we’ve known about because we’ve talked with (other) people in the insurance industry for years,” Berg-Hansen said of the charges against Marsh. “It amazes me that it took this long for them to get called on it.”

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