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Critical Issue Report The buck has stopped Brokers ’fess up and pay up By Phil Zinkewicz Earlier this year, three of the world’s largest insurance brokerage firms reached settlement agreements with New York State Attorney General Eliot Spitzer’s office after Spitzer made allegations against the firms of bid rigging and/or steering of insurance business to particular insurers. In the case of Marsh & McLennan, by far the largest of the three brokers, the company agreed to pay $850 million in restitution, to replace top management, to apologize for “unlawful” and “shameful” business practices, to abolish its practice of collecting contingent commissions, and to adopt additional reforms aimed at improving transparency and service to insurance customers. Marsh itself faced no criminal sanctions, but eight former executives of Marsh Inc., a subsidiary of Marsh & McLennan, were indicted last September for their roles in bid rigging. The indictments came after 17 individuals at five companies, including eight former Marsh employees, pleaded guilty to criminal charges in the ongoing insurance industry investigation that began a year ago. According to the indictments, defendants and other Marsh employees told their excess casualty clients that they obtained bids for their business from insurance companies in an open and competitive bidding process. In fact, defendants had rigged the process in the following ways: First, before any bids were submitted, the defendants determined which insurance company would win the business. Second, they set a “target” for the winner to submit as its bid. Third, they obtained losing bids, which they called “B quotes,” from other participating insurance companies. By misleading customers into believing that the customers’ interests came first, the conspirators fraudulently obtained millions of dollars in commissions and fees for Marsh and millions of dollars in premiums for the insurance companies. The victim companies ranged from high-technology firms to a fruit cannery to a cosmetics manufacturer, the indictments said. Those indicted face various charges, including fraud, grand larceny and restraint of trade. Of course, the indictments are merely accusations, and defendants are presumed innocent until and unless proven guilty. The insurance companies with which Marsh executives were alleged to have colluded include American International Group, Zurich American Insurance Company, ACE USA, Liberty International Insurance Company and other companies. At press time, no settlement agreements had been reached with ACE, AIG, Zurich or Liberty. Regardless of the criminal trials’ outcomes, Marsh must still pay the $850 million in restitution. In addition, settlements were reached with Aon Corporation for $190 million in restitution to policyholders and with Willis North America for $50 million. In the Aon situation, where the company faced charges of “steering” business to favored insurers that promised significant contingent commissions, Spitzer, along with Acting New York State Insurance Superintendent Howard Mills, Connecticut Attorney General Richard Blumenthal, Illinois Attorney General Lisa Madigan and Illinois Acting Director of Insurance Deidre Manna, reached an agreement where the Chicago-based Aon would provide the $190 million over a 30-month period and adopt a new business model to avoid conflicts of interest. In addition, Aon Chairman and CEO Patrick G. Ryan issued a public statement apologizing for Aon’s improper conduct. In announcing the settlement, Spitzer said: “The underlying complaint in this case shows that improper conduct was pervasive at Aon. To its credit, however, the company has acknowledged the problems, has agreed to compensate policyholders and has adopted reforms that will provide greater accountability in the future.” Superintendent Mills said that, under the terms of the settlement, Aon will “bring greater transparency to the insurance marketplace by providing significant disclosure to clients and instituting substantive corporate governance reforms.” Aon has also promised to cease paying contingent commissions in the future. Attorney General Blumenthal said: “This hidden ‘pay to play’ scheme severely hit both public and private purses, including ordinary consumers, towns and cities, taxpayers and major educational institutions.” Attorney General Madigan said: “Our investigation revealed that Aon Corporation accepted secret payments from insurers for steering them business. Aon’s acceptance of these secret payments was a direct conflict of interest that harmed Aon’s clients. Aon’s acceptance of kickbacks was not only unethical, but illegal.” As for Willis, which also faced allegations of steering to benefit from contingent commissions, the firm has agreed to make restitution to policyholders to the tune of $50 million. Among the reforms adopted by Willis is a new policy where the company will accept one payment only for an insurance contract at the time of placement, and such payments will be fully disclosed to and approved by customers. The questions that remain are: Who will get these settlement monies? How will the monies be distributed? And who will monitor their distribution? To find the answers to these questions, Rough Notes spoke with the New York State Attorney General’s office. A spokesperson for Spitzer’s office said that the monies are in special funds that will be used to pay back buyers of insurance who were injured by the brokers’ activities. In the case of Marsh, some funds had already been distributed to buyers who had put in claims after the fund was set up. The spokesperson said that it is up to Marsh to negotiate with the buyers to determine the amount each buyer is to receive. He said that Spitzer’s office will monitor the fund’s distributions. In the cases of Aon and Willis, the spokesperson at press time said that the funds had not yet distributed any monies, but that the procedures would probably follow Marsh’s. All of these developments are the results of investigations conducted by Spitzer and various other regulatory bodies, but one disclosure of an insurance broker’s “misrepre-sentations” actually came, not from regulatory investigations, but from the broker itself. The Leavitt Group, headquartered in Cedar City, Utah, is the 20th largest agent/broker organization in the United States, with 90 locations in 13 states. Each location is typically owned 60% by Leavitt Group Enterprises and 40% by the local agency manager. The Leavitt Group of Albuquerque specializes in selling insurance to New Mexico-based Native American tribes, pueblos and related enterprises. In a press release last October, Leavitt Group acknowledged that the managing co-owner in its Albuquerque office was dismissed on September 23 for misrepresentations made in proposals to 20 current or former clients over a six-year period. The clients affected are associated with seven tribes or pueblos. According to Leavitt Group counsel Mike Chidester, the misrepresentations were made in annual insurance renewal proposals in which a recommended legitimate insurance quote was contrasted with one or more falsified comparison quotes. The falsified comparison quotes either were never issued by cited insurers, or were inflated by the dismissed individual so as to appear noncompetitive. Chidester indicated that the misrepresentations “harmed clients by creating a false appearance of competition and service, and by unfairly guiding client choice.” Rough Notes spoke with Dane O. Leavitt, chief executive officer of the Leavitt Group, who said that the problems were brought to light on September 15 by a former Leavitt Group of Albuquerque client who advised the group’s parent company, Leavitt Group Enterprises, of irregularities in a past renewal quote presented by the managing co-owner. “We conducted our own internal investigation between September 15 and September 26,” said Leavitt. “The audit confirmed that misrepre-sentations in quoting had occurred with respect to the reporting former client, and also with respect to additional past and present clients,” he said. “We reported the misrepresentations to the New Mexico Insurance Department on September 26 and promised to make a full report at a later time.” Leavitt said that between September 27 and September 29, he and others from the organization met separately with each of the clients and former clients harmed, informed them of the misrepresentations, provided copies of audit findings and discussed related matters. Said Leavitt: “We have sought to determine swiftly what happened, tell clients and regulators what happened, apologize, set things right and put and retain in place people who will serve clients fairly in the future. It will take some time to resolve these breaches of trust, but we will. We regret what happened. This circumstance is not a fair reflection of the more than 1,000 Leavitt Group associates who fairly and professionally honor the trust extended by our clients, including the wonderful remaining employees in the Albuquerque office.” Leavitt was quick to point out that this development was not the result of collusion with insurance companies. It was a matter of one person, working alone, fabricating insurance company quotes that just didn’t exist, he said. The co-manager’s motivation, Leavitt speculated, was that it was a hard market and the co-manager didn’t want to lose business. “We’re saddened that we have lost clients as a result of this situation, and we don’t intend to let it happen again,” Leavitt said. Asked what lessons we can learn from the Marsh, Aon, Willis and, now, Leavitt situations, Leavitt said that company management needs to be more vigilant in looking out for problem areas that can mushroom into serious situations. * The author |
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