Spitzer insurance investigation grows, files fraud suit against broker Universal Life Resources

By Ameet Sachdev, Staff Reporter
The Chicago Tribune
November 13, 2004

The New York attorney general charged a California life insurance broker Friday with fraud and other violations in connection with hidden incentive payments.

In a civil suit filed in a New York state court, Atty. Gen. Eliot Spitzer accused Universal Life Resources of San Diego of concealing millions of dollars a year in payments from insurance companies. The suit further alleges that the company went so far as to solicit fictitious bids to exclude insurers that did not agree to the payments.

Other employee benefit consultants, including Chicago-area Hewitt Associates Inc. and Aon Corp., acknowledged receiving such incentive payments. A spokeswoman at Hewitt said the company stopped accepting such payments in May. Hewitt hasn't received any requests for information from Spitzer's office.

Chicago-based Aon has previously said it will no longer accept such fees.

The suit against Universal Life Resources is part of Spitzer's wide-ranging insurance probe that has already netted civil charges against Marsh & McLennan Cos., the world's largest insurance brokerage, and criminal charges against executives at two big insurance companies. Universal Life's New York attorney, Robert Cleary, of Proskauer Rose LLP, declined to comment.

At the heart of the investigation are "contingent" payments from insurance companies to brokers based on the volume or profitability of the business.

Spitzer has called these incentives kickbacks because brokers allegedly used them to steer business to insurers paying the special commissions, against the best interests of their corporate clients. In the suit against Marsh, Spitzer alleged that such arrangements led to bid-rigging and other anti-competitive practices.

Although contingent payments have been a widely accepted practice in the insurance industry, they were not widely disclosed to clients, Spitzer and other critics say. They go by several names depending on the type of insurance sold. In property and casualty, they also are known as "placement service agreements." In life and health insurance, they are generally known as "overrides."

Spitzer is also investigating Aon, the No. 2 broker, for possible anti-competitive practices.

Aon disclosed that its property and casualty brokerage business collected $100 million in contingent commissions in the first nine months of 2004. Its consulting business, which among other services brokers employee benefits including medical, dental and life insurance, also collected contingent fees of $17 million over the same period, which represented less than 2 percent of consulting revenues of about $900 million.

An Aon spokesman said the company's contingent fees are disclosed on its Web site and in contracts. He declined to comment on the Universal Life suit.

A spokeswoman at Lincolnshire-based Hewitt Associates said insurers would send the company "unsolicited" override checks when it hit certain volume targets.

"We didn't have written agreements with any insurance carriers calling for payment of overrides," said spokeswoman Joanne Laffey.

Overrides were not disclosed

She said that the override payments were never disclosed to clients because they were based on overall volume rather than attributed to a specific client's business. She said overrides were never revealed to Hewitt consultants so they could maintain their objectivity.

Laffey declined to disclose the dollar amount of the overrides but said they were less than 1 percent of the revenues in its health management consulting business between 2001 and 2004.

The company halted the practice after regulators began looking into the appropriateness of such payments across the industry, Laffey said. "We thought it would make sense to stop the practice and be totally transparent with our clients," she said.

In the complaint against Universal Life Resources, Spitzer said that the company generally didn't disclose to its clients that it was receiving overrides for the sale of group life, disability and other insurance coverage. The company also collected "communication fees" from insurers for the preparation and distribution of enrollment materials, the suit said.

Universal Life Resources has brokered coverage since 1999 for 4 million employees of firms including Intel Corp., Eastman Kodak Co., Colgate-Palmolive Co., Marriott International Inc., United Parcel Service Inc., Viacom Inc. and Dell Inc., according to Spitzer's office.

Marsh probe was the start

"Today's case demonstrates that the corrupt practices first laid bare in the Marsh suit are present in additional sectors of the industry," Spitzer said in a statement. "Secret payoffs and conflicts of interest that infected the market for property and casualty insurance have taken root in the employee benefits market as well."

Spitzer's suit names MetLife Inc., Prudential Financial Inc. and UnumProvident Corp. as among the companies writing policies brokered by Universal Life.

The suit also alleges that some of the hidden payments to the broker were passed along in the form of higher premiums to the employees of the corporations it represented. Those payments were never disclosed to the employees, the suit alleges.

Copyright 2004 The Chicago Tribune

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