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Undisclosed Broker Fees: Did You Pay Too Much for Your Insurance?

By Christopher H. Yetka & Thomas F. Pursell
Lindquist & Vennum, P.L.L.P.

In October 2004, Eliot Spitzer, the Attorney General of the State of New York, filed a complaint against the largest insurance broker in the world, Marsh & McLennan Companies, Inc. (MMC), and its operating unit Marsh, Inc. (collectively “Marsh”). In the complaint, he accused Marsh, among other things, of fraud, violation of antitrust laws and unjust enrichment stemming from Marsh’s use of contingent commission agreements and its manipulation of the insurance procurement process. While not listed as defendants, the complaint implicates some of the larger insurance companies, including AIG, ACE, the Hartford, and Munich–American Risk Partners, a division of American Reinsurance. And in fact, Spitzer’s complaint and allegations have resulted in pleas of guilty to antitrust charges by insurance company employees from Zurich, AIG and ACE.

As a result of the investigation, the president and chief operating officer of Marsh, Inc., along with the chairman and general counsel of MMC, have all stepped down. In addition, MMC has announced it will lay off 3,000 employees. Spitzer has further increased the scope of his investigation and has included the world’s second largest insurance broker, Aon. He also filed a second civil complaint in November 2004—this one against a California-based brokerage, Universal Life Resources. Spitzer’s wide-ranging allegations have rocked the insurance industry and promise to cause significant changes in broker compensation practices.

At the heart of the allegations are contingent commission agreements, also called placement service agreements or market service agreements. Through these agreements Marsh—although purporting to act on behalf of the insurance buyer—would receive allegedly undisclosed additional payments from insurance companies based upon the volume of insurance placed with those companies, the retention rate of policies at renewal, and the profitability of the account.

According to the allegations, Marsh would steer business to insurers with which it had these agreements and away from insurers who didn’t. Because of the market share that Marsh controlled, it was in the position to force insurers to enter into these agreements, or face large losses in business. The allegations further state that Marsh participated in these actions despite the duty it owed to its clients to get the best insurance at the best price. In the complaint, Spitzer notes that Marsh stated: “Our guiding principle is to consider our client’s best interest in all placements,” and “We are our client’s advocates, and we represent them in negotiations. We don’t represent the [insurance companies].” By choosing insurers based on its desire for contingent commissions, rather than on the needs of its clients, the complaint states that Marsh breached a fiduciary duty to its clients.

Beyond steering business in exchange for undisclosed contingent commissions, Spitzer’s complaint further states that Marsh participated in a form of price fixing called “bid rigging.” This scheme allegedly involved Marsh deciding which carrier—naturally, one that would pay Marsh a contingent commission—would win a particular client bid. It would then solicit “cover” bids from other carriers—deliberately high, noncompetitive bids designed to give the client the appearance of competitive bidding. The understanding, in such situations, was that insurers giving cover bids would later have the favor returned. The complaint alleges that this manipulation of the procurement process caused clients to pay higher prices than they would have paid in a competitive market.

For example, the complaint describes an “A, B, C quote” system of signals between AIG and Marsh. According to the complaint, in an “A” quote, Marsh would give AIG a target premium and terms. If AIG agreed to quote Marsh’s target, it would keep the business, regardless of whether it might have quoted more favorable terms or premiums. The “B” quote was allegedly used where AIG was not supposed to get the business. In this circumstance, AIG would look at the expiring terms and provide a quote high enough to ensure it wouldn’t get the business. In this scenario, AIG wouldn’t even perform standard underwriting, but would do so only after the fact in the rare instance they actually got the business. Finally, it is alleged that when Marsh signaled a “C” quote, AIG understood there was no existing carrier to protect, and AIG could quote whatever it wanted. In fact, the complaint states that a Marsh managing director warned AIG that it would lose its entire book of business with Marsh if it did not provide the “B quotes” described above.

Finally, recent press reports and subpoenas issued by Spitzer have raised concerns about another potential antitrust violation called “tying.” In an unlawful tying arrangement, a company with market power over one product uses that market power to force (“tie”) the purchase of a second product. This aspect of the New York investigation is specifically directed at the suspicion that brokers would only place business with an insurer if the insurer agrees to purchase reinsurance through that broker.

What Spitzer’s investigation and its fallout might mean to average policyholders will depend on the actions of their brokers. If Spitzer’s theories are correct—and it is important to remember that they have not been tested in court—a policyholder who bought insurance through a broker who had an undisclosed contingent commission agreement with the insurance company may have paid an artificially high premium. But there are other possible damages. Steering of coverage may have caused not only increased premiums, but also differences in coverage. If a policyholder has a substantial claim denied, and can show it would have had a policy that provided coverage if not for the contingent commission agreement, it may be able to recover against the broker that improperly steered them away from coverage. Additionally, insurance companies that had business steered away from them because they refused to pay contingent commissions may also have claims.

Class action lawsuits have already been started based upon the Spitzer allegations. Policyholders must keep themselves apprised of the status of this litigation so that they can determine whether they have a claim, and if so, maximize their recovery. 

ABOUT THE AUTHORS

Christopher Yetka is a trial attorney practicing in the area of commercial litigation, focusing his practice on insurance coverage disputes. He can be reached at 612-371-2416 or by e-mail at cyetka@lindquist.com.

Thomas F. Pursell is a trial attorney and a former Minnesota Deputy Attorney General experienced in the investigation and litigation of consumer fraud and antitrust cases. He can be reached at 612-371-3201, and at tpursell@lindquist.com.

This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular questions.

riskVue | The webzine for risk management professionals
December 2004