With a press release entitled "Investigation Reveals Widespread Corruption in Insurance Industry" and the filing of a civil complaint against Marsh & McLennan Companies, Inc. and Marsh Inc., Eliot Spitzer formally opened the next front in his war on the financial services industry. In a complaint replete with references to internal Marsh communications, Spitzer alleges a conspiracy among Marsh and several named insurers based on the existence of "Market Service Agreements" or "Placement Service Agreements" (i.e., contingent commission agreements) and alleged quote rigging based on a system of "A, B, C" quotes.
Spitzer's suit includes six causes of action: (1) "Fraudulent Business Practice" under New York Executive Law Section 63(12), which is based on Marsh's alleged fraudulent or illegal acts; (2) "Antitrust," based on alleged conspiracies with AIG, ACE, Hartford and others as a result of non-competitive bidding processes; (3)-(4) "Securities Fraud" and violations of New York General Business Law Section 352-c, based in part on Marsh's alleged failure to disclose the significance of contingent commissions in its financial statements; (5) "Unjust Enrichment" based on allegations that Marsh deprived its insurance clients and investors of "a fair market place"; and (6) "Common Law Fraud."
As noted, Spitzer's Complaint primarily calls into question two practices allegedly employed by Marsh -- Market Service Agreements/Placement Service Agreements and an "A, B, C" quote system. According to the Complaint, the Service Agreements resulted in insurer payments to Marsh based on how much business was placed with the insurer, successful renewals and profitability of business that was placed with the insurer. These agreements allegedly were not disclosed to Marsh's insurance clients, and resulted in Marsh violating its duties to its clients by funneling business to a number of favored insurers.
The Complaint also alleges that Marsh employed an "A, B, C" quote system with AIG, and possibly other insurers. "A" quotes were used on renewals where AIG was the incumbent carrier. Marsh would allegedly provide AIG with a target premium and policy terms, and if they were accepted, AIG would keep the account. "B" quotes were used where another insurer was the incumbent on the account. Again, Marsh allegedly provided a target premium and policy terms. However, there was an understanding that the premium set by Marsh was higher than the incumbent's quote. Spitzer alleges "AIG provided a quote consistent with the target premium set by Marsh, thereby throwing the bid," with the implicit understanding that other carriers would do the same, resulting in other accounts coming to AIG. Finally, "C" quotes were given in instances where Marsh allegedly had no incumbent carrier to protect and would allow "real competition."
Since filing the Complaint last week, along with announcing that executives at both AIG and ACE had plead guilty to criminal charges arising from alleged "bid fixing," Mr. Spitzer has announced that he is investigating allegations that insurance brokers "tied" the placement of primary business to agreements that carriers would reinsure that business with or through the brokers' reinsurance intermediary affiliates. Additionally, California Insurance Commissioner John Garamendi announced that he will file separate civil suits, that may target both commercial and personal lines sales activity, and introduce new insurance regulations requiring disclosure of, or banning, contingent commissions.
The fallout may not be limited to the property and casualty side of the business. Issuers of group life and health and employee benefits products have announced that they have received subpoenas from Mr. Spitzer, and Mr. Garamendi has threatened to bring civil suits against companies offering life, auto and homeowners insurance. Furthermore, there is a high probability that other insurance departments and attorneys. general have taken note of the situation and may pursue their own, or joint, investigations against insurers and insurance brokers.
At this point, it appears that the breadth of the investigations in New York, California and elsewhere will likely only grow in the coming months and may well spread to many additional defendants. Based on our extensive experience representing clients in connection with investigations by Mr. Spitzer and other governmental officials and agencies at both the state and federal levels, it is important that companies that might be subject to investigations act promptly to determine their exposure. Companies would be well advised to consider engaging independent counsel to conduct an investigation to determine whether, and to what extent, persons at the company may have engaged in the types of conduct currently under scrutiny. This should enable the company to better position itself to confront any possible agency investigation or legal action.
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