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A Trust Eroded

Times Staff Writer

Like a lot of big insurance buyers, Philip G. Paccione is waiting for the smoke to clear so he can see whether he got burned.

As general counsel of Skechers USA Inc., Paccione is responsible for buying a wide variety of insurance for the Manhattan Beach-based casual shoe maker, which had 2003 sales of about $850 million.

He has been closely following the scandal that began unfolding Oct. 14 when New York Atty. Gen. Eliot Spitzer filed a civil fraud lawsuit against giant insurance broker Marsh & McLennan Cos. Spitzer accused Marsh of rigging bids for commercial insurance contracts and taking kickbacks from insurers in exchange for steering them business.

What Spitzer called kickbacks the insurance industry calls “contingent commissions” -- fees that insurers pay brokers under arrangements that long have been standard practice in commercial insurance. After Spitzer declared that the fees posed an inherent conflict of interest for brokers, who are supposed to represent buyers, Marsh and rivals Aon Corp. and Willis Group Holdings Ltd. swore off accepting them.

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Faced with such revelations, “you start to question the integrity of the whole industry,” Paccione said.

Paccione said he was encouraged that Skechers’ insurance broker, whom he declined to identify, hadn’t been implicated in Spitzer’s probe or in inquiries by California Insurance Commissioner John Garamendi and other state authorities.

But the investigation is continuing. Spitzer filed suit Friday against Universal Life Resources Inc. of Del Mar, Calif., which had been under investigation by Garamendi’s office as well. Spitzer charged Universal with rigging bids on insurance contracts and with concealing from its clients extra fees that it received from insurers.

Paccione’s doubts echo those of commercial insurance buyers nationwide, many of them multinational corporations that think of themselves as sophisticated customers and hard-nosed negotiators.

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Few large companies have yet filed suit against brokers or insurers, according to lawyers representing such firms, but all are asking questions and getting ready to go to court if necessary.

“Companies are pretty concerned. They want to at least be made whole,” said John DeQ. Briggs, a partner at Howrey Simon Arnold & White in Washington, which represents a number of Fortune 500 clients in insurance matters.

Although most major buyers are holding their fire, at least one wide-ranging racketeering suit has been filed as a class action, accusing brokers and insurers of fraud and collusion.

OptiCare Health Systems Inc., a Waterbury, Conn., vision care firm, filed the suit in August with Marsh as the sole defendant. After Spitzer’s action, OptiCare broadened the suit to include as defendants a slew of other firms mentioned in the New York complaint, including Aon, Willis and insurers American International Group Inc., Ace Ltd. and Hartford Financial Services Group Inc.

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OptiCare accused the brokers and insurers of engaging in a “massive scheme to manipulate the market for commercial insurance,” in which brokers rigged bids and steered business to insurers that provided them with the most favorable contingent-commission arrangements.

Marsh did not respond to a request for comment on the suit, but the company has pushed out three top executives -- including its chief executive -- and set aside $232 million to cover any settlement with Spitzer.

Corporate America has been slow to follow OptiCare, which is something of a troubled company. The firm recently restated its financial statements for 2002, 2003 and the first quarter of 2004, and the firm’s president abruptly resigned last month. Its shares closed Friday at 25 cents on the American Stock Exchange, up 1 penny.

Michael G. Cherkasky, Marsh’s new chief executive, said in a conference call with analysts last week that he had been having “daily meetings with some of our larger clients” and that though they had been posing “hard questions,” the clients generally had been patient.

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Cherkasky said Marsh’s client retention rate had declined but that there had been no wholesale defections. He acknowledged that rivals had been trying to exploit Marsh’s predicament by encouraging buyers to switch brokers.

Some buyers also are being pressured by their boards of directors to drop Marsh.

If companies decide they’ve been wronged by their brokers, negotiations will go only so far, Briggs said, because “it’s not as if they can afford to just give everybody their money back.”

He said any lawsuits probably would target not only brokers but also insurers, which have far deeper pockets.

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Alarm over the Spitzer disclosures has spread to Britain, where many of the same brokers and insurers operate.

The Assn. of Insurance and Risk Managers, a London-based organization representing commercial insurance buyers, last week called on British regulators to investigate contingent commissions.

The group cited a survey showing that 93% of its members thought the practice should be investigated or banned outright. According to 64% of those polled, the practice “always creates a conflict of interest.”

The group’s U.S. counterpart, the Washington-based Risk & Insurance Management Society, has called for greater disclosure of all fee arrangements but has taken no position on whether contingent commissions should be banned, Janice Ochenkowski, vice president for external affairs, said last week.

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Ochenkowski will be a witness Tuesday along with Spitzer, Garamendi and others at a hearing by the Senate subcommittee on financial management, chaired by Sen. Peter Fitzgerald (R-Ill.). The panel will discuss contingent commissions, conflicts of interest and whether the current regulatory framework is adequate.

Neal R. Brendel, a Pittsburgh-based partner in the law firm Kirkpatrick & Lockhart, which represents Skechers and other large insurance buyers, said customers who weren’t getting their questions answered forthrightly by Marsh or other brokers should consider switching.

“You should be saying, ‘If you expect me to go forward with you, you’ve got to make a clean breast,” Brendel said in a recent interview.

Paccione, the Skechers executive, said he had long been suspicious of the way insurance prices were set.

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“It’s like the Florida orange juice market,” he said. “There’s a frost in Florida and suddenly prices spiral throughout the nation.”

Insurers seemed to seize on the 9/11 terrorist attacks as an excuse to raise prices on all kinds of coverage, not just terrorism-related, he added.

Paccione said he would try patience before demanding answers from his brokers and insurers.

“I’m waiting for it to calm down as the issue of the month,” he said. “If somehow, some way, I’ve been aggrieved, a few months’ delay won’t hurt me.”

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(BEGIN TEXT OF INFOBOX)

Key dates in the insurance probe

* Oct. 14: New York Atty. Gen. Eliot Spitzer files suit against broker Marsh & McLennan Cos., alleging that it conspired with insurance companies to rig bids and inflate costs to clients.

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* Oct. 16: The Times reports that Universal Life Resources Inc., a Del Mar, Calif., firm that brokers life and disability coverage for large employers, is under investigation by California officials.

* Oct. 20: California Insurance Commissioner John Garamendi proposes rules aimed at eliminating conflicts of interest in the selling of insurance policies.

* Oct. 23: The Times reports that insurance brokers in the Los Angeles office of Marsh & McLennan say they were forced to steer clients away from one insurer to boost commissions. The company later says it is investigating the claims.

* Oct. 25: Under pressure from Spitzer, Marsh & McLennan Chief Executive Jeffrey Greenberg resigns. He is replaced by Michael Cherkasky.

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* Nov. 12: Spitzer files a lawsuit against Universal Life Resources, alleging that it forced insurers to inflate premiums for company-

sponsored life and disability plans.

Source: Times research

Los Angeles Times

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