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 | | From: | Edmund Fitzgerald | | Subject: | Complaint claims secret kickbacks raised insurance costs | | Date: | Fri, 21 Jan 2005 22:10:26 -0500 |
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 | From:
http://cbs.marketwatch.com/news/story.asp?guid=%7BC6FC0D46-ACB6-4CCC-84FC-98
E9D5C958CC%7D&siteid=google&dist=google
Conn. attorney general sues Marsh, Ace
Complaint claims secret kickbacks raised insurance costs
By Alistair Barr, MarketWatch
Last Update: 4:36 PM ET Jan. 21, 2005
SAN FRANCISCO (MarketWatch) -- Connecticut Attorney General Richard
Blumenthal sued Ace Ltd. and broker Marsh & McLennan Friday for allegedly
taking part in a scheme to conceal commissions from insurance buyers.
The illegal scheme raised the cost of insurance for customers, Blumenthal's
complaint alleges.
The suit specifically claims that Ace Financial Solutions, a unit of
Bermuda-based insurer Ace, paid Marsh a secret $50,000 commission to steer
an $80 million state contract to the company, according to a statement
issued by Blumenthal's office.
"As offensive as this specific scheme is the outrageously common pattern and
practice of illegal commissions and kickbacks that it reflects," Blumenthal
said in the statement. "This lawsuit -- the first of a series anticipated
against insurance abuses -- shows particular arrogance and avarice in
victimizing the state and its taxpayers."
Shares of New York-based Marsh fell 50 cents, or 1.6 percent, to close at
$31.01 on Friday, while Ace stock dropped 85 cents, or nearly 2 percent, to
$42.83.
"We've been providing information to the Connecticut attorney general and we
will continue to cooperate with him," a Marsh & McLennan spokeswoman said.
The company hasn't taken action against any employees that may have been
involved in the scheme alleged by Blumenthal, she added.
Ace is cooperating with Blumenthal and other state jurisdictions, Robert
Grieves, a spokesman for the insurer, said.
The suit focuses on commissions that insurers paid Marsh and other leading
brokers for access to big insurance clients. The payments have been
variously called market-service agreements, placement-service agreements,
overrides and kickbacks.
New York Attorney General Eliot Spitzer sued Marsh on Oct. 14 for rigging
insurance bids and accepting kickbacks in return for steering business to
favored insurers.
Spitzer's suit, which implicated big insurers such as American International
Group , Ace and Hartford , has sparked a slew of other investigations by the
U.S. Securities and Exchange Commission, state attorneys general and
insurance commissioners.
Pay to play
Blumenthal's complaint cited evidence that insurers felt they had to pay
overrides to Marsh in order to get business from them -- what the suit
called "pay to play."
The suit quoted an unidentified insurance company manager saying, "With
Marsh if we don't have an override we should not call them ... they flat out
told us if we want to write business we need to have an override end of
story."
That created a conflict of interest, the complaint argued. Although Marsh
claimed it was acting solely in the interests of its clients, the payments
divided the company's loyalties between insurance buyers and the insurance
company.
The complaint quoted another unidentified insurance vice president telling
Marsh: "Our definition of 'incentive' is that you are financially motivated
to act in [our] best interests."
Department of Administrative Services
The main evidence cited in Blumenthal's suit centers around an insurance
policy purchased in 2001 by Connecticut's Department of Administrative
Services, or DAS.
In April 2001, DAS wanted to save money by hiring an insurance company to
manage 678 workman's compensation cases. In return, the department would pay
the insurer a fixed amount, which the company could then invest and use to
pay future expenses.
This type of insurance -- often called nontraditional, loss-mitigation or
finite insurance -- is also being investigated by regulators, including the
SEC.
DAS chose Marsh and another broker, Hagedorn & Company, to help it find the
best deal. When responding to the department's request, Marsh named Ace
among its "preferred" companies and agreed to limit its commission to a
$100,000 fee from the state.
Despite this promise, Marsh demanded that Ace pay a commission on the DAS
contract, if it wanted to continue receiving similar business, the suit
claims.
The department ended up awarding Ace the contract in November 2001, paying
the firm $80 million to take over the cases.
On Dec. 3, 2001, less than two weeks after the deal was finalized, a Marsh
executive told the company's New York office that Ace had agreed to pay a
$50,000 commission on the DAS contract. The two companies then signed a
confidentiality agreement preventing Ace from revealing the terms of the
deal.
Blumenthal's office said it's investigating whether Ace may have paid
additional illegal commissions to Marsh.
The suit accuses Marsh of violating Connecticut consumer protection laws by
accepting a commission other than the $100,000 paid by the state, falsely
claiming that it considered only the state's best financial interests in
arranging the contract, and falsely claiming that it recommended Ace solely
on that company's qualifications.
The complaint seeks actual and punitive damages, information that will help
determine how much Marsh was falsely paid and reimbursement for legal and
investigative expenses, Blumenthal's office said.
Blumenthal, who subpoenaed more than 25 insurers and brokers late last year,
is continuing probes of related abuses in the rest of the insurance
industry.
Alistair Barr is a reporter for MarketWatch in San Francisco.
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