By KATE BERRY
The insurance brokerage 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 and other insurance brokers took kickbacks and fees to steer business to large insurers,allegations 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, also known as 17200.
Neither of the lawsuits alleges bid-rigging or price-fixing similar to those that arose from Spitzer’s probe.
Last month Spitzer filed a civil suit charging Marsh with misleading corporate clients by faking and rigging bids for insurance contracts and favoring insurers that paid higher commissions.
Insurers American International Group Inc. and Ace Ltd. and broker Aon Corp. also were named in the Spitzer suit.
Late last month, California Attorney General Bill Lockyer started his own investigation into alleged bid-rigging by insurance firms and brokers.
The California probe is focusing on possible violations of California’s antitrust law, known as the Cartwright Act, as well as potential fraud by companies.
California Suits
One of the earlier lawsuits filed in San Francisco, 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.
Without getting competitive quotes, businesses may be overcharged or may miss out on buying less expensive coverage, he said.
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 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.
Berry is a staff writer with the Los Angeles Business Journal.
