Insurance Coverage
OCTOBER 2004
Insurance Industry Bid-Rigging/Steering Scheme
Allegations Demand Policyholder Attention
New York Attorney General Eliot Spitzer’s October 14 civil
complaint against the world’s largest insurance broker, Marsh
Inc., and its parent, Marsh & McLennan Companies, Inc. –
and his related criminal investigation (which already has led to
three guilty pleas) – carries potentially significant implications
for policyholders worldwide.
The 87-paragraph, six count complaint alleges, with a significant
degree of detail, that Marsh orchestrated an elaborate price-fixing
scheme in the insurance industry, using the long-standing
practice of contingent commissions (also known as “placement
service agreements” or “market service agreements”), as vehicles
for kickbacks to steer business to favored insurers, including
A.I.G., ACE Ltd., and The Hartford, a unit of The Hartford
Financial Services Group. As alleged in the complaint:
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“Marsh has corrupted [the marketplace for insurance]
by distorting and elevating the price of insurance for
every policyholder.”
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“Since at least the late 1990s, Marsh has designed and
executed a business plan under which insurance
companies have agreed to pay Marsh more than a
billion dollars in so-called ‘contingent commissions’ to
steer them business and shield them from competition.”
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“Marsh solicited — and obtained — fictitious high
quotes from insurance companies in order to deceive its
clients into believing that true competition had taken
place.”
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“Marsh does not, as it contends…‘consider their client’s
best interest.’ Nor is Marsh truly its clients’ disinterested
‘advocate.’ To the contrary, Marsh primarily represents its
own interests and those of its favored insurance
companies.”
■
“Marsh has repeatedly provided clients with false and
inflated quotes. It frequently designates a winner, and
then solicits inflated bids from other insurance companies,
who provide such bids, knowing that later they themselves
will have a turn to get business without meaningful
competition.”
■
“A cast of the world’s largest insurance companies have
participated in Marsh’s steering scheme…, colluding with
Marsh to rig bids and submit false quotes to unwitting
clients.”
Of course, at this stage in the proceedings, the allegations have
yet to be established as proven facts. These and other allegations
arose out of a series of investigations commenced in
Spring 2004. The initial targets of the investigations included
not only Marsh, but also the nation’s two other largest brokerage
organizations, Aon Corp. of Chicago, and Willis Group
Holdings, Inc., each of which received subpoenas in April;
Spitzer’s investigation also has pursued a number of insurance
companies, including Chubb, A.I.G., ACE Ltd. and Hartford.
As currently configured, the Spitzer complaint names only
Marsh; however, as reported in the trade press, observers predict
that similar allegations may well be lodged against other brokers.
Also as reported, certain of the insurers involved in the
investigation are cooperating with the New York Attorney
General’s office. Whether these insurers will be named as
defendants remains an open issue.
Last August, in reaction to the recent investigations, well-known
class action plaintiffs’ counsel, Milberg Weiss and Lerach
Coughlin, filed separate civil actions against Marsh, Aon, and
Willis in California pursuant to the California Business and
Professions Code, which prohibits any “unlawful, unfair, or
fraudulent business act or practice...”, and a class action
complaint in the Southern District of New York alleging breach
of contract, breach of fiduciary duty, negligent misrepresentation,
and civil RICO.
Kirkpatrick & Lockhart LLP
To be sure, if the allegations in the Spitzer complaint are
established, scores of corporate policyholder victims may have
civil claims against Marsh, and possibly other insurance brokers,
for injuries suffered as a result of this alleged scheme. For
example, the bid-rigging scheme alleged by Spitzer, if proven
true, would be an actionable restraint of trade under section 1 of
the Sherman Antitrust Act, 15 U.S.C. § 1 (and state statutory
counterparts), which provides for treble damages.
Indeed, these allegations potentially support a variety of
common law and statutory causes of action, including, for
example, causes of action for or relating to unfair and deceptive
trade practices, fraud, breach of contract, professional
malpractice, professional negligence, breach of the duty to
disclose, breach of the covenants of good faith and fair dealing,
civil conspiracy, civil RICO, and unjust enrichment, among
others. Potentially available damages include rescission of the
broker engagement and disgorgement of commissions,
restitution, compensatory damages (trebled in some instances,
as noted above), punitive damages, attorneys’ fees and costs.
In addition, the allegations that Marsh did not “consider [the
policyholder’s] best interest”—but rather the interests “of its
favored insurance companies” —coupled with alleged insurer
payments to Marsh based upon the profitability of the business
placed by Marsh, raise serious concern that Marsh’s (and
possibly other brokers’) divided loyalties may have negatively
impacted its performance as an intermediary with respect to
claims presentation and claims handling issues.
Mindful of the importance of the business relationship between
a policyholder and its insurance broker, which in many
instances is long-standing, corporate policyholders who may
have been victimized nonetheless would be well advised to
consider taking the following action:
✓
❑ Determine whether Marsh or any of the other insurance
brokers under investigation has been involved in the
company’s placement of insurance coverage at any time
from the late 1990s through the present
✓
❑ Collect and preserve information relating to insurance
placement involving any of the insurance brokers and insurers
under investigation, particularly with respect to “bids” solicited
from purportedly competing insurance carriers
✓
❑ Collect and preserve broker marketing materials provided
✓
❑ Collect and preserve information relating to the amount of
commissions, fees, or other remuneration paid to any of the
insurance brokers under investigation
✓
❑ Identify and carefully review any significant claims that were
resolved with any of the insurers under investigation through
the involvement of Marsh, or one of the other insurance
brokers under investigation
✓
❑ Exercise caution in any outside communications regarding
the circumstances surrounding potential claims, particularly
communications with the brokers and insurance companies
under investigation
For companies with an Insurance or Risk Management
Department, this department may be the first point of contact and
best source of information when analyzing potential claims.
As the Spitzer complaint is likely to spur a flurry of class actions,
corporate policyholders are advised to promptly evaluate their
potential claims in order to best protect their ability to secure
independent representation and, if appropriate, to assert individual
causes of action to preserve a full measure of recovery.
NEAL R. BRENDEL
nbrendel@kl.com
412.355.6550
ROBERTA D. ANDERSON
randerson@kl.com
412.355.6222
The Insurance Coverage practice group at Kirkpatrick & Lockhart
LLP is one of the nation’s largest policyholder-oriented practices.
Its attorneys have authored Policyholder’s Guide to the Law of
Insurance Coverage and edited the Journal of Insurance Coverage.
FOR ADDITIONAL INFORMATION about these issues, please consult
the authors or any of Kirkpatrick & Lockhart’s office contacts listed below:
National
Boston
Dallas
Harrisburg
Los Angeles
Miami
Newark
NewYork
Pittsburgh
San Francisco
Washington, D.C.
Peter J. Kalis
John M. Edwards
Robert Everett Wolin
Carleton O. Strouss
David P. Schack
Daniel A. Casey
Anthony P. La Rocco
Peter J. Kalis
Thomas M. Reiter
Edward P. Sangster
Matthew L. Jacobs
412.355.6562
617.261.3123
214.939.4909
717.231.4503
310.552.5061
305.539.3324
973.848.4014
212.536.4828
412.355.8274
415.249.1028
202.778.9393
pkalis@kl.com
jedwards@kl.com
rwolin@kl.com
cstrouss@kl.com
dschack@kl.com
dcasey@kl.com
alarocco@kl.com
pkalis@kl.com
treiter@kl.com
esangster@kl.com
mjacobs@kl.com
Unless otherwise indicated, the attorneys are not certified by the Texas Board of Legal Specialization.
by any of the insurance brokers under investigation
✓
❑ Collect and preserve information relating to retention of any
®
of the insurance brokers under investigation, the scope of
services to be provided, and the manner of compensation
Kirkpatrick & Lockhart LLP ®
Challenge us.
www.kl.com
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