State to Sue Insurers Over Broker Fees

California regulators said Wednesday that they would sue four of the nation’s biggest insurance companies for allegedly steering kickbacks to San Diego-based broker Universal Life Resources Inc., which has agreed to cooperate with state investigators to settle charges against it.

Insurance Commissioner John Garamendi said a civil lawsuit would be filed in state court today against MetLife Inc, Prudential Financial Inc., Cigna Corp. and UnumProvident Corp.

Universal also will be named as a defendant in the case, but it has agreed to cease the alleged improper practices and cooperate with the state’s probe, Garamendi said.

“We are going to aggressively continue these actions because this kind of activity has a profound and negative impact on consumers,” Garamendi said in an interview. “They are paying tens of millions of dollars, in all probability, unnecessarily. These practices only benefit the brokers and the insurance companies at the expense of their clients.”

Universal is hired by major companies to broker group life and disability insurance for employees. Garamendi contends that insurers paid Universal millions of dollars in hidden fees in return for getting corporate business funneled to them.

The insurance companies generated much of the hidden revenue for Universal by charging each insured worker $10 to $20 in vague “communications fees,” ostensibly to cover the cost of brochures, according to an advance copy of the suit, which the Department of Insurance provided to The Times. In reality, the suit maintains, these costs amounted to no more than a few dollars per worker.

“As a result of these unlawful practices, defendants have and continue to increase their profits at the expense of California policyholders,” the suit says. Universal, for one, has retained “millions of dollars in undisclosed fees, while purporting to provide independent and unbiased advice to their clients.”

Representatives of the four insurance companies said they had not seen the suit and couldn’t comment.

Universal Chief Executive Douglas P. Cox didn’t return calls for comment. The company issued a statement through attorney David Gabianelli, saying that it is “pleased that the California Department of Insurance has chosen to work with the firm to reach an agreement on how ULR does business, particularly in the state in which it is headquartered, and to resolve the issue of how compensation is disclosed.”

The state suit would be the first naming insurance companies since New York Atty. Gen. Eliot Spitzer filed charges against giant broker Marsh & McLennan Cos. on Oct. 14, alleging that it conspired with several large insurers to rig bids and inflate the cost of commercial policies.

Spitzer’s action touched off an escalating probe of insurance industry operations.

Spitzer filed a civil suit against Universal last week, making allegations similar to those in the California complaint. Spitzer could not be reached late Wednesday to provide reaction to the agreement that Garamendi had struck with the company.

In addition to the communications fees assessed on employees, the state suit alleges that the insurers also paid Universal undisclosed commissions, consulting fees and “numerous non-monetary gifts that operate as kickbacks for placing insurance with the insurer defendants.”

In a regulatory filing for Intel Corp.’s benefit plan, UnumProvident disclosed that it had paid Universal roughly $300,000 in commissions for life, health and disability coverage during 2002 and 2003. Unknown to Intel and its employees, however, Unum actually paid Universal more than $1 million in fees and commissions from its Intel account -- costs that were secretly passed on to Intel and its workers, according to the suit.

In several instances, the suit says, employers including Wal-Mart Stores Inc. and ChevronTexaco Corp. inquired about the fees and whether they could be eliminated to lower employee costs. The insurers said the costs couldn’t be reduced, the suit says, and denied that any hidden fees even existed.

The state suit, like the Spitzer suit before it, claims that insurance companies were required by Universal to keep quiet about off-the-books revenue streams if they wanted to keep getting accounts thrown their way.

Under California law, insurance brokers that hold themselves out as the customer’s representative are legally bound to serve the client’s best interest rather than their own. Full disclosure of compensation agreements is also required by Internal Revenue Service and Labor Department rules that govern employee-benefit plans.

Garamendi said Universal had agreed to a permanent injunction against improper practices as a condition for settlement. The state will not seek restitution from the company, which also faces a civil class-action case, but it will ask that any ill-gotten gains from the insurer defendants be frozen and placed in trust, he said. Garamendi noted that the amount of those gains must be determined at trial, but could amount to the entire premiums collected by the insurers.

In addition to Intel and ChevronTexaco, major companies that hired Universal as a broker included Safeway Inc., PG&E; Corp.’s Pacific Gas & Electric Co. and Northrop Grumman Corp., the suit says. The case was prepared for the Department of Insurance by San Diego law firm Lerach, Coughlin, Stoia, Geller, Rudman & Robbins.