Unum, HRH Boston Affiliate Settle for $1.3M Over Contingent Fees
The Insurance Journal
June 14, 2005
A major life insurance company and insurance consulting firm will pay $1.3 million to resolve allegations that the insurer brokered a lucrative deal involving hundreds of thousands of dollars in undisclosed commissions in violation of contracts with the state, Massachusetts Attorney General Tom Reilly announced.
The excessive incentives, AG Reilly said, were in clear violation of the state Group Insurance Commission's "no commissions" policy put in place to protect against financial conflicts of interest that can drive up costs for the Commonwealth.
The complaint and settlements, filed in Suffolk Superior Court, name O'Neill, Finnegan & Jordan, a Boston insurance brokerage firm hired by the GIC in 2000 to help select a life insurance carrier, and Unum Life Insurance Company, the company ultimately chosen to provide group term life insurance to state employees and retirees.
O'Neill, Finnegan & Jordan was then part of Hobbs Group, LLC, which has since been acquired by Hilb, Rogal & Hobbs, a national insurance broker based in Glen Allen, Virginia. Unum Life is part of UnumProvident Corporation, a Tennessee-based insurance company.
"This case highlights the inherent conflict of interest when a consultant or broker takes money from insurers for placing business with them, and never reveals the financial incentives that they stand to gain," AG Reilly said. "In this case, the GIC paid a fee for objective advice, and sought to protect itself by prohibiting these payments, yet these companies ignored the contract, and placed their own interests before their obligations to the state."
Recent enforcement actions against national brokers such as Marsh & McClennan have brought the issue of contingent commissions to the forefront, raising concerns about conflicts between the best interests of brokers and their clients.
According to the complaint, the transactions between Unum and OFJ highlight that conflict of interest, and just how lucrative the contingent commission arrangements can be. Although OFJ's total consulting fee from GIC was $59,885, the placement of GIC's business with Unum could have resulted in more than $1 million in commissions under the deal between Unum and OFJ, according to the complaint, if the GIC had not discovered the deal.
To protect against conflicts of interest and avoid paying unnecessary
marketing costs, GIC's contract with OFJ, signed in 2000, prohibited the receipt
of "direct or indirect" commissions from insurance carriers. GIC's contract with
Unum, which called for annual premiums of more than $25 million, also banned
the payment of "commissions or finder
The complaint alleges that Unum paid OFJ $456,000 in incentive compensation directly related to the GIC policy during 2001 alone. Two years later, when GIC learned of these payments, Unum and OFJ explained that these financial incentives were paid as part of a "Special Producer Agreement," which the companies contended were different than "commissions."
"What is most distressing about this case is that it has poisoned the atmosphere between us and the consultants we hire to help us with our procurements, " GIC Executive Director Dolores L. Mitchell said. "We have had a long tradition of trust and respect for our consultants, and have always assumed that they were working in our best interests instead of their own. Betraying that trust has made it more difficult for all of the consultants, and has put a cloud on the professional relationship we have enjoyed for so long."
Mitchell added, "I hope this case will alert purchasers and consultants alike that you cannot expect to walk both sides of the street at once."
According to AG Reilly's complaint, Unum and OFJ violated the Massachusetts False Claims Law, which authorizes the state Attorney General to recover triple damages resulting from false claims and fraudulent conduct involving state funds. As a result of the lawsuit, the companies will pay $1.3 million, which reflects the Attorney General's claim seeking damages for the $456,000 in commissions paid to OFJ by Unum as well as a $59,000 consulting fee paid by the state to OFJ.
AG Reilly also alleged in the complaint that in addition to violating the no commissions clause, OFJ improperly steered the GIC group life contract to Unum by giving the carrier detailed information on another finalist's bid, which also violated their contract.
The complaint also alleges that in the middle of the procurement process - while OFJ was making its insurance recommendations to GIC - Unum and OFJ negotiated their "Special Producer Agreement," which significantly increased the compensation payable to OFJ if Unum won GIC's business. When GIC learned of that agreement between the companies, Unum agreed to "recoup" the money from OFJ. Instead, the complaint alleges, the companies submitted misleading records and statements to GIC, showing that the payments had been "recouped" when they had not.
The Massachusetts Group Insurance Commission is one of New England's largest purchasers of group term life insurance, administering more than $3 billion in life insurance for Massachusetts employees and retirees.