Latest allegations open new direction in insurance investigation

Associated Press
May 27, 2005

HARTFORD, Conn. -- The latest allegations in the already scandal-plagued insurance industry may lead investigators in a new direction.

Insurance brokerage firm Hilb Rogal & Hobbs announced Thursday that Robert B. Lockhart, president and chief operating officer, resigned Wednesday and another unidentified employee was fired.

Company Chairman Martin L. Vaughan III told employees in a memo that the company's Hartford office may have illegally given or received money as part of deals to place three clients with insurance companies.

Two other, larger brokerage firms have been the focus of probes of whether they received fees from insurance companies in exchange for business.

However, the investigation of HRH raises the possibility that some insurers may have concealed bonus commissions in premiums, said state Attorney General Richard Blumenthal.

"It's a somewhat new direction, but the same industry and the same problem of consumers harmed by secret payments that ultimately distort and constrain competition," he said.

Blumenthal would not identify HRH customers who may have been affected. But he said some clients or customers were obstetric-gynecology groups that purchased professional liability insurance.

"Very bluntly, what's new about this scheme is that it may be contributing to the escalating cost of medical malpractice insurance," he said. "A lot of folks have been saying that anticompetitive conduct may be contributing to the inflationary cost of professional liability insurance. Now here is some reason to believe it may be true."

The attorney general also said his investigators are interested in clients "as sources of information and targets."

Liz Cougot, a spokeswoman for Hilb Rogal & Hobbs in Glen Allen, Va., declined comment.

Ross Garber, the brokerage firm's lawyer in Hartford, would not comment about specific accusations.

"Hilb Rogal & Hobbs voluntarily brought these issues to the attention of the appropriate authorities, including the attorney general," he said. "It's continuing to cooperate in the ongoing investigation."

Shares of Hilb Rogal & Hobbs fell nearly 12 percent, or $4.51, Friday to close at $33.69 on the New York Stock Exchange.

Allegations against HRH also are being investigated by the state Insurance Department, said Jane McLaughlin, the agency's chief of staff.

Ty Childress, a lawyer at Howrey LLP in Los Angeles, said the exchange of money between insurance companies, brokers and prospective policyholders offers a broad array of compensation methods.

"There's obviously all kinds of ways these issues have come up," he said. "I'm not sure anyone has uncovered all the ways brokers and insurers have paid each other."

At a minimum, full disclosure is necessary, Childress said.

Blumenthal said disclosure would "overcome some of the problems, but we're talking about favoritism shown to carriers. Disclosure is definitely a necessary element of the remedy but it may not be completely sufficient alone," he said.

The accusations against HRH, the seventh-largest brokerage firm in the United States, differ from practices by No. 2 Aon Corp. of Chicago and Marsh & McLennan Companies Inc., which is the nation's largest broker.

Aon agreed in March to end the practice of soliciting incentive fees. The agreement was similar to one earlier this year with Marsh & McLennan of New York, which agreed to pay $850 million in restitution to end New York Attorney General Eliot Spitzer's investigation into bid-rigging, price-fixing and the use of hidden incentive fees.

Copyright 2005 Newsday Inc.

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