State Pursues Insurance Probe
State regulators are investigating a San Diego brokerage that was accused in a civil suit of improperly steering business to favored insurance companies, people familiar with the probe said Friday.
The state investigation is examining whether the broker, Universal Life Resources Inc., failed to fully disclose payments it received from insurance companies that it recommended to its corporate clients, said the sources, who spoke on condition of anonymity.
Payments from insurance companies to brokers were spotlighted by New York Atty. Gen. Eliot Spitzer on Thursday in a lawsuit against Marsh & McLennan Cos., the world’s largest insurance broker. The suit accused Marsh of conspiring with insurance companies and rigging bids to trick clients into thinking they were getting the best deal on their insurance.
Spitzer’s case widened Friday, with a guilty plea from a third insurance company executive and the disclosure of new subpoenas. In addition, Marsh & McLennan said it would replace the head of its Marsh Inc. unit and suspend its practice of collecting so-called contingent commissions from insurance companies.
Industry critics say these payments present an inherent conflict of interest, tempting brokers to throw business to insurance companies that offer them the highest compensation.
California Insurance Commissioner John Garamendi confirmed that his office was pursuing an investigation into the dealings between brokers and insurance companies, but he declined to name the firms being scrutinized. Garamendi also said that any action by the state could be supplemented by a private lawsuit.
The state Department of Justice also is “in discussions with the Department of Insurance about this general subject,” said Tom Dresslar, a spokesman for California Atty. Gen. Bill Lockyer.
In a lawsuit filed Thursday, Universal was accused of violating the state business code by steering its brokerage clients to insurance companies that paid kickbacks. The suit, filed on behalf of Bay Area consumer group United Policyholders, said Universal clients were unaware of these arrangements.
Universal executives declined requests for comment. The firm specializes in arranging group life, accident and disability insurance for large and mid-size employers.
The United Policyholders suit also named MetLife Inc., Prudential Financial Corp. and Cigna Corp., saying the insurers “failed to make adequate disclosure” of their relationships with the broker. The companies declined to comment.
United Policyholders previously filed suits alleging similar arrangements by Marsh and two other brokers, Aon Corp. and Willis Group Holdings Ltd., and various insurance companies. These firms could not be reached for comment.
“We have been investigating this for many months,” said Amy Bach of United Policyholders. “We always assumed that Garamendi and Lockyer would become involved.”
The United Policyholder complaints were filed by San Diego law firm Lerach Coughlin. John J. Stoia Jr., an attorney at the firm, said California regulators were contemplating moving to stop Universal from collecting commissions from insurance companies.
Although he wouldn’t confirm any enforcement action, Garamendi said he was preparing draft regulations that at a minimum would require commercial insurance brokers to disclose commissions paid by insurers, and possibly bar the payments.
“A broker works for the customer, the insured, in this case a company buying the insurance,” Garamendi said. “But a contingency commission is coming from the other side. And in my personal view, it’s impossible to work for two competing organizations simultaneously.”
Insurance industry officials said they could not yet say how they would respond to new rules.
“We support a competitive insurance marketplace,” said Joe Annotti, vice president of the Property Casualty Insurer’s Assn. of America. “Anything that skews the nature of that marketplace, whether it is burdensome regulation or illegal activity of companies, is not in the best interest of consumers, companies or the market.”
Meanwhile, insurance company and broker stocks continued to plummet on Wall Street on Friday, a day after Spitzer filed his suit. Marsh’s shares fell $5.65 to $29.20. The stock is down 36.7% in two days.
Spitzer announced Friday that Patricia Abrams, a vice president at insurance company Ace Ltd., had pleaded guilty to a misdemeanor charge of attempt to restrain trade and competition. That followed guilty pleas Thursday from two executives at insurance giant American International Group Inc. in connection with a scheme to rig bids with Marsh.
Marsh and AIG said they were cooperating with Spitzer. AIG also said Friday that it expected to halt future payments of contingent commissions.
Also Friday, MetLife and broker National Financial Partners Corp. disclosed new subpoenas from Spitzer. Both said they were cooperating.
