Investigation Reveals Widespread Corruption In Insurance Industry
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Background Information
Green Welling LLP is investigating claims of market manipulation, including extortionate kick backs and collusive bid rigging, by a coalition of insurance companies and brokers.
A lawsuit filed by the New York Attorney General indicates that at least one sector of the insurance marketplace – that for complex insurance placements – is distorted and corrupted by industry-wide fraudulent and deceptive business practices.
On October 14, 2004, the New York Attorney General sued insurance broker Marsh & McLennan and its Marsh, Inc. subsidiary, alleging that its core business plan is illegal. Under the plan, insurers agreed to pay Marsh & McLennan "contingent commissions,” while Marsh & McLennan agreed to steer business to the insurers and shield them from competition. As these commissions were largely passed on to Marsh & McLennan's customers in the form of increased premiums, the arrangement between Marsh & McLennan and the insurers was essentially a kick back scheme. The insurers participating in the scheme also assisted each other by giving phony quotes to Marsh & McLennan. Marsh & McLennan would then present these quotes to its customers in order to foster the illusion of competition.
Contingent Commissions and Complex Insurance Placements
The victims of the scheme – Marsh & McLennan's client base – are primarily midsize and larger corporations and high net-worth individuals, for whom off-the-shelf insurance products are not suitable. Such insurance customers have more complex needs, and the scheme was made easier by the complexity of these insurance placements. Because these insurance packages are not commodity items, a purchaser generally needs the expertise of an insurance broker, and customer oversight or "comparison shopping” is accordingly made more difficult. To a greater extent than ordinary insurance buyers, these customers are forced to rely on the truth of brokers' representations. These representations include implicit and explicit guarantees that the brokers were operating in their customers' best interests.
Contingent commissions are paid to brokers by insurers and are in addition to the commissions paid to the brokers by their clients. The payments are made under contracts generally known as "Placement Service Agreements,” and are based on the amount of business a broker places with the insurer; the amount of incumbent business the broker successfully renews for the insurer; and the profitability of the business placed by the broker.
(Marsh & McLennan changed the name of its Placement Service Agreements to the more benign-sounding "Market Services Agreements” after prior government scrutiny. On October 15, 2004 – the day after the New York Attorney General filed suit – Marsh & McLennan suspended all of its Placement Service Agreements.)
Insurance brokers' industry groups have defended Placement Service Agreements generally as providing "value-added benefits” to commercial customers and as representing a "win-win” arrangement for all involved. These groups have also defended Placement Service Agreements as fully disclosed to the client. However, Marsh & McLennan's disclosure only vaguely touted "intellectual capital” and "services” as the consideration it provided to insurers in exchange for the commissions. Marsh & McLennan did not disclose its policies of allocation and bid-rigging, nor did it disclose that the commissions are usually passed through to its customers in the form of higher rates – that is, that the commissions are at odds with the brokers' primary service of obtaining the best rate available.
The Marsh & McLennan Scheme
The Complaint filed by the New York Attorney General alleges that, at least since the late 1990s, Marsh & McLennan operated the scheme in cooperation with a group of insurers, AIG, ACE, Hartford, and Munich-American among them. Marsh & McLennan required insurer-participants in the scheme to pay for the privilege, and this requirement was communicated to insurers in no uncertain terms. The Complaint quotes a Marsh & McLennan executive as telling the president of insurer ACE that "if ACE wants us to meet significant premium growth targets then ACE will have to pay 'above market' for such a stretch.” Nor was the scheme kept under wraps internally. The Complaint quotes another Marsh & McLennan executive as telling employees that "we need to place our business in 2004 with those [insurers] that . . . pay us the most.”
Marsh & McLennan also expected participating insurers to help keep the scheme going. This meant submitting phony bids when asked to, and refraining from submitting competitive bids when asked to. The phony bids were proffered by Marsh & McLennan to its customers as proof that the bidding process was competitive, while the absence of competitive bids ensured that Marsh & McLennan controlled the entire process.
Refusal to participate in the process meant exclusion from the business entirely. As succinctly stated by Marsh & McLennan Director of Marketing William Gilman in a message to AIG, Marsh & McLennan "protected AIG's ass” when it was the incumbent carrier, and Marsh & McLennan expected AIG to similarly "protect" other incumbents in turn. Thus, the insurers allowed Marsh & McLennan to allocate business among them with the understanding that their turn to receive business would come. Any "lost” business opportunity was more than made up for by their ability to gouge Marsh & McLennan's customers, even after the kickback to Marsh & McLennan.
Marsh & McLennan's Ill-Gotten Gains
Marsh & McLennan's 2003 revenue from Placement Service Agreements was $845 million. This figure is more than half of Marsh & McLennan's 2003 net income of $1.5 billion. Beyond Marsh & McLennan's immediate customers the scheme's victims include the employee participants in Marsh & McLennan's customers' corporate benefit programs.
Contact Us For More Information
If you or your company purchased insurance coverage from a broker, you may be a victim of price fixing. If so, you are entitled to get this money back. To speak with an attorney about contingent commissions and your legal rights, Please contact Robert Green, Jenelle Welling, or John Pillette by emailing gw@classcounsel.com or calling 415-477-6700. You may also contact one of us through our website, using the form above. Any information will be held in confidence, and there is no obligation on your part.