Gallagher served with subpoena

3rd-party unit is Spitzer's subject

By Ameet Sachdev
Chicago Tribune Staff Reporter
December 3, 2004

Itasca-based insurance broker Arthur J. Gallagher & Co. said it was subpoenaed Thursday by New York Atty. Gen. Eliot Spitzer, a move that could indicate a new area of interest in his investigation of the business-insurance industry.

Gallagher is the second local company to be served with court-ordered requests for information. Chicago-based Aon Corp., the world's second-largest insurance brokerage, has been under investigation since April.

The latest subpoena was served on a Gallagher unit known as a third-party administrator, and not its brokerage operations.

Third-party administrators process claims but do not carry any insurance risk. A number of commercial brokers own third-party administrators that manage claims for worker's compensation, disability and other employee benefits programs.

Executives in the insurance industry said that Spitzer may be looking at whether insurance brokers receive financial incentives to refer business to third party administrators owned by their companies and whether those fees were disclosed to corporate insurance buyers.

A spokesman for Spitzer's office said the attorney general does not comment on subpoenas. Calls to Gallagher were not returned.

Spitzer has drawn Gallagher into his probe seven months after he subpoenaed the world's three largest brokers, Marsh & McLennan Cos., Aon and Willis Group Holdings Ltd. Corporate insurance buyers go to brokers for help in placing their insurance.

In a civil lawsuit filed in October, Spitzer accused Marsh & McLennan of rigging bids to steer business to insurers from whom it received lucrative special commissions for hitting volume and other targets.

Spitzer has sharply criticized the commissions, saying they can create a conflict and raise fees for customers. After Marsh was sued, Aon and Gallagher, the fourth-largest broker, said they would stop accepting the commissions.

The suit has sparked investigations by regulators in at least 25 other states who are also questioning how individual lines of insurance are sold. Gallagher has received subpoenas and requests for information from state attorneys general and insurance officials regarding its brokerage operations. The company said it is cooperating with all inquiries.

Gallagher also announced that it hired independent legal counsel to perform an internal review of its operations. As of the end of October, the company said it had not identified any improper practices.

Gallagher was one of the first brokers to form a third-party administrator when it started Gallagher Bassett Services in 1962. Today it is ranked as the largest property/casualty third-party administrator in terms of 2003 revenues by Business Insurance magazine.

Copyright © 2004 Chicago Tribune

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