NY, CT Sue Liberty Mutual
AGs say insurer used kickbacks to lift sales
By Ross Kerber, Staff Writer
May 6, 2006
Liberty Mutual Group used kickbacks and bid-rigging to boost sales, the attorneys general of New York and Connecticut charged in lawsuits filed yesterday against the Boston insurance giant.
The allegations are the latest moves by New York Attorney General Eliot Spitzer and Connecticut Attorney General Richard Blumenthal in an ongoing investigation of the insurance industry. The probe has already led to massive settlement payments from companies like Marsh & McLennan Cos. and American International Group.
''It is simply appalling that a major financial institution would rig bids and induce brokers and agents to abuse their position of trust with the insurance-buying public," Spitzer said in a statement yesterday.
Unlike larger insurers that have settled with Spitzer, however, Liberty Mutual said it will vigorously defend itself rather than accept a proposed settlement.
In a statement, Liberty Mutual called the terms Spitzer and Blumenthal have offered so far ''excessive and unreasonable: both in terms of magnitude and in their demands that we change legitimate business practices in states outside their legal jurisdiction."
Specifically, Liberty Mutual denied the kickback allegations, and blamed the bid-rigging charges on two former low-level employees it said ''seriously violated our trust and our standards." One left in 2001 and the other resigned during its investigation in 2005, the company said. The company said it is disappointed the suits were filed. ''Liberty Mutual has a culture not just of compliance, but of 'doing the right thing,' " its statement said. The company declined to make executives available to be interviewed.
Liberty Mutual, Blumenthal, and a spokesman for Spitzer, Marc Violette, all declined to describe the settlement talks in detail. But Violette said they were based on a blueprint established by previous deals such as a $1.6 billion payment by AIG disclosed earlier this year, in which the company did not admit wrongdoing. Though Violette said Spitzer does not demand personnel changes, executives such as AIG chairman Maurice R. ''Hank" Greenberg and Marsh & McLennan's Jeffrey Greenberg lost their jobs.
Robert Hartwig, chief economist for an industry trade group, the Insurance Information Institute, said Liberty Mutual's response marks the strongest challenge yet to the theory at the heart of yesterday's suits that a standard industry commission structure amounts to kickbacks to insurance agents. The structure encourages more competition for customers, Hartwig said. ''The fact of the matter is, it makes sense to allow them," he said.
Large companies like Marsh & McLennan and small neighborhood insurance agents are known in the industry as ''producers." They arrange the sale of life or casualty insurance contracts from carriers like Liberty Mutual.
According to the suits, since the mid-1990s Liberty Mutual and other insurers have paid hundreds of millions of dollars in so-called contingent commissions to the biggest producers, including Marsh & McLennan, Aon Corp., Willis Group, and Arthur J. Gallagher & Co.
The contingent commissions are based on factors such as renewal rates or profitability. These often went undisclosed to customers, but meant that producers' recommendations to their clients ''were biased in favor of insurers who paid contingent commissions," according to Spitzer's suit, a violation of their fiduciary duties to clients.
Spitzer's suit states that Liberty Mutual sometimes ''took this corruption a step further" by colluding with Marsh & McLennan and others to rig bids and submit false price quotes to clients nationwide. The actions took place in the area known as ''excess casualty insurance," which covers losses above the limits of standard insurance policies.
To make sure a favored insurer such as Liberty Mutual would win a certain client's business, the regulators charged, Marsh & McLennan would tell other insurers to provide ''intentionally losing bids" that were described as ''fake," ''backup," or ''protective quotes."
Both suits cite the Aug. 8 guilty plea to criminal charges by Liberty Mutual assistant vice president Kevin Bott, who said Marsh & McLennan brokers instructed him to submit protective quotes to help another carrier win the bid, providing millions of dollars in commissions and fees to Marsh & McLennan. Liberty Mutual would win other business in return, Bott said, and his supervisor knew of the arrangement.
The suits quote an e-mail exchange in which a Marsh & McLennan executive wrote, ''I need a . . . quote from Liberty. I finally had AIG agree to write this thing at $140,000. Have Liberty come in around $175,000." Marsh & McLennan later sent this e-mail to Bott's supervisor at Liberty Mutual with the message ''I will talk to you later."
Blumenthal's suit also describes an e-mail exchange from 2001 in which a Marsh & McLennan employee, who later pleaded guilty to a fraud charge, wrote that he needed ''another bad indication from Liberty." He was later sent a $275,000 quote by a Liberty Mutual employee, ''well above what Liberty Mutual knew was the winning bidder's offer," the suit states. That employee, identified in the suit as Jason Monteforte, left the company that year, Liberty Mutual said.
In an interview, Blumenthal said the examples show the extent of the problems. ''The bid-rigging and steering of contracts in return for hidden kickbacks was a pattern and practice, not an instance of two rogue employees," he said.
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