Was AG Settlement 'ACEs Wild'?

The Connecticut Law Tribune
Publication Date: 02/24/2006
Posted 04/01/2006

When Connecticut Attorney General Richard Blumenthal alleged fraud against insurance broker Marsh & McLennan earlier this year, the investigation seemed particularly resonant for corruption-weary Connecticut. Marsh allegedly accepted of a $50,000 fee to position ACE Financial Services front and center when the state looked to offload a chunk of its workers' compensation liability.

ACE got that $80 million contract. Perhaps because it paid Marsh its contingency fee, ACE was the only insurer Marsh presented to the state.

That policy wrinkle could mean that, even though the amount of the fee paid by ACE was relatively small, the potential financial cost to the state was much greater, due to the lack of competition for the contract. Blumenthal acknowledged as much when filing suit against Marsh earlier this year.

"The state certainly was deprived of fair and competitive bidding with full disclosure, and may well have also been deprived of the best possible deal," he told The Law Tribune in January.

Yet last week the attorney general forged what he calls an "interim" settlement in the case against ACE for $40,000--with $15,000 of that meant to cover the costs of the investigation, according to the agreement. ACE was not required to sign any kind of consent decree or behavior modification agreement.

That puzzles some observers, like Dennis Kerrigan, a partner at LeBoeuf, Lamb, Greene & MacRae's Hartford office, who represents some players in the AG's insurance investigation, but not ACE. While the dollar amount of the settlement could be fair if one solely considers the size of the contingency fee Marsh paid, Kerrigan said, the future conduct piece is important.

"I'm a little surprised there was no mention of future conduct," Kerrigan said, adding that this settlement was "actually not a bad result for ACE. It is a unique circumstance, but it's on the low end when you consider the state contract at issue."

But Blumenthal emphasized that the settlement is dependent on ACE's continued cooperation.

"The policy concerns were somewhat alleviated by the facts that came to our attention about the value of the contract," the attorney general said. "We've been assured that the contract had value [to the state]. It was not a sham."

The state paid ACE $80 million to begin servicing the liability for 660 of its workers' compensation claims. From the taxpayers' perspective, the one-time $80 million payout was supposed to save money in the long run, because it removed the yearly appropriation necessary to pay the claim benefits. ACE would have an incentive to settle as many claims as possible, because it could then keep whatever was left of the $80 million. (FBIC Note: What is extremely wrong with this picture and scenario?)

According to data provided to The Law Tribune earlier this year by the Workers' Compensation Commission, ACE has settled at least 394 cases in the last three years, resulting in $28.9 million in payouts. That means the company still has over $50 million of the original $80 million contract amount, paying out 36 percent of the contract amount to settle 60 percent of the claims. (FBIC Note cont'd: This means that ACE gets to keep the remaining $51.1 million out of the total state's payout of $80 million paid to ACE to be used to settle as many of the state's 660 workers compensation claims ... and in this case ACE gets to keep the $51.1 million remaining unused balance for the 40 percent of the claims not settled? So the more that ACE settles, the less $$$ left for ACE? What an incentive for ACE not to offer an adequate or proper settlement, to not settle a claim and invitation for "bad faith"?)

It is impossible to know whether the state could have done better than the $80 million price tag charged by ACE, and Blumenthal said that's part of the reason his office decided to settle with the company.

"If we were to go to court and have to prove damages, it could be very problematic," he said. However, the attorney general noted that, because the $40,000 settlement only covers the contingency fee, nothing would preclude additional monetary recovery should the investigation determine that the $80 million contract was inflated.

Blumenthal buried his announcement of the ACE settlement amid fresh allegations against Marsh outside of the ACE deal, involving fees paid in connection with commercial policies. The attorney general's expanded allegations came just one day after the National Association of Insurance Commissioners announced a global regulatory settlement with Marsh, in which the broker agrees to a series of business reforms.

New York Attorney General Eliot Spitzer has also announced an $850 million settlement with Marsh. However, Blumenthal said he wants more restitution for Connecticut customers than what would be coming under the New York settlement.

Copyright 2005 ALM Media, Inc.

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