Marsh & McLennan to pay $850 million in settlement

By Ameet Sachdev
Chicago Tribune Staff Reporter
February 1, 2005

Insurance broker Marsh & McLennan Cos. has agreed to pay $850 million to settle civil fraud allegations that it steered business to insurance companies in exchange for lucrative payoffs.

Under the settlement announced Monday with New York Atty. Gen. Eliot Spitzer, Marsh will not pay a fine or penalty. It also did not admit guilt, protecting itself against future lawsuits.

Marsh apologized for the behavior of employees who "unlawfully deceived their customers" and said that such conduct was "shameful." Spitzer, in an October lawsuit, accused the company of bid rigging and steering bids to insurers who paid special fees called contingent commissions.

"We don't believe that our corporate entity has ever been involved in a pattern of covering up or a pattern of criminal behavior," said Michael Cherkasky, Marsh's chief executive.

While the amount of the settlement appears steep, Marsh will spread the payments over four years, thus minimizing the financial hit. The settlement will go to clients nationwide who were allegedly harmed or misled by Marsh's actions. The company also agreed to reforms aimed at improving its ethics.

Spitzer credited Marsh for "embracing restitution and reform as a way of making a clean break from the practices that misled and harmed its clients in the past."

The agreement marks the first settlement in Spitzer's wide-ranging investigation of the insurance industry that has focused on conflicts of interest between brokers and insurers. Chicago-based Aon Corp., the nation's second-largest insurance broker after Marsh, is in talks with Spitzer but has not been charged with wrongdoing.

A spokesman for Spitzer's office said more civil settlements are coming but he said he didn't know when.

Spitzer has been probing Aon's acceptance of contingent commissions as well as arrangements under which Aon steered business to insurers who in turn would let the company arrange its reinsurance. Fees for reinsurance can run into the tens of millions of dollars.

If the Marsh settlement is any indication of future settlements, investors have less reason to worry, analysts said.

The apology was included in the New York attorney general's news release but not in Marsh's. Because the apology is limited to a few people at the company, it does not constitute a formal admission of corporate guilt, Marsh officials said. That distinction will limit future litigation, analysts said.

Limits on future action seen

"I thought the settlement terms were pretty favorable for Marsh," said Adam Klauber, an analyst at Cochran, Caronia Securities in Chicago. "By not admitting corporate wrongdoing, it should be more challenging to bring any civil or state action against them."

He added that by spreading the $850 million over four years, Marsh should not have to borrow money to make restitution to clients. The funds will compensate U.S. clients who used Marsh to buy insurance between Jan. 1, 2001, and Dec. 31, 2004, where placements resulted in contingent commissions.

Its Illinois-based clients are eligible for about $45 million in restitution, Cherkasky said. Clients who accept the money will have to agree not to sue Marsh on claims related to the investigation, he said.

Marsh's shares rose $1.41, or 4.5 percent, to close at $32.50 on the New York Stock Exchange. Aon's shares also climbed, closing at $22.74, up $1.06, or 4.9 percent.

The restitution fund represents a little more than the $800 million that Marsh collected in contingent fees in 2003, a practice Spitzer likened to kickbacks, according to the lawsuit.

No comment from Aon

Aon collected about $200 million in contingent commissions in the same year.

"If there's a pattern developing here, Aon could afford the $200 million [settlement]," Klauber said.

Aon declined to comment on any possible settlement. The company already has acknowledged some employees have violated the company's business-conduct code but stopped short of acknowledging any illegal acts.

In the event of a settlement, Aon likely will have to agree to the same business reforms outlined in the Marsh pact. The new practices, some of which already have been adopted, include limiting insurance-brokerage compensation to a single fee, banning acceptance of contingent commissions and requiring that all compensation be disclosed to clients.

Marsh said it would book a pretax charge of $618 million in the fourth quarter, in addition to the $232 million settlement reserve it established in the third quarter. It still faces civil charges filed by Connecticut Atty. Gen. Richard Blumenthal, and a host of private lawsuits.

Copyright 2005 Chicago Tribune

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