Actions ‘Shameful,’ Insurance Broker Says
Apologizing for its “shameful” behavior, Marsh & McLennan Cos. agreed Monday to pay $850 million to settle charges by New York Atty. Gen. Eliot Spitzer that it cheated clients by rigging insurance bids and taking kickbacks.
It is the largest settlement yet with a company caught in the recent spate of corporate scandals, topping a $750-million deal between WorldCom Inc. (now MCI Inc.) and the Securities and Exchange Commission.
The $850 million will be used to compensate customers who were gouged by the insurance broker’s practices.
As part of the agreement, Marsh acceded to Spitzer’s demand for a written apology. “Certain Marsh employees unlawfully deceived their customers,” the statement said in part, adding that “such conduct was shameful.”
Chief Executive Michael G. Cherkasky said the deal would help Marsh regain its footing, “even though it’s a lot of money” to pay.
“We’ve lived under this dark cloud of uncertainty. Everyone has been under suspicion,” Cherkasky said in an interview. “It was very hard for our people and our clients to live through.”
Shares of Marsh rose $1.41 to $32.50 on Monday on the New York Stock Exchange.
The stock had plummeted after Spitzer filed suit against the company Oct. 14, diving from $46.13 on Oct. 13 to $24.10 on Oct. 19.
In the suit, Spitzer alleged that Marsh frequently steered clients to major insurers that made backdoor payments to the broker, and in some cases even fabricated bids to deceive clients into thinking they were getting the lowest-priced policies.
“To its credit, Marsh is not disputing the problems identified in our original complaint,” Spitzer said in a statement Monday.
“Instead, the company has embraced restitution and reform as a way of making a clean break from the practices that misled and harmed its clients in the past,” the statement said.
As part of the settlement, Marsh formally agreed to stop accepting so-called contingent commissions from insurance companies -- the payments that Spitzer contends amount to kickbacks. Marsh, and other major brokerages including Aon Corp. and Willis Group Holdings Ltd., suspended acceptance of these payments shortly after Spitzer filed his complaint last fall.
Marsh also agreed to accept only a single fee for placing clients with insurance companies, and to clearly disclose it. Experts said Marsh’s practices probably would become the benchmark for the industry.
“If Marsh is disclosing everything, it’s hard to see how its big competitors can get by without disclosing,” said David Schiff, editor of Schiff’s Insurance Observer newsletter.
Although it issued an apology, Marsh neither admitted nor denied wrongdoing, as is common in such settlements. No portion of the $850-million payment is considered a fine, however, which is unusual in corporate wrongdoing cases.
That structure helps Marsh in several ways: eliminating a potential barrier when bidding on government contracts, for example, and removing a possible weapon that could be used against it by civil attorneys.
Cherkasky, who replaced former CEO Jeffrey Greenberg after the suit was filed, said the deal might have positive tax implications, by lowering the company’s reported earnings.
“We certainly hope there’s a tax benefit for us, but we’ll see,” he said.
Cherkasky said the company had given Spitzer information about allegations of improper practices in Marsh’s Los Angeles office.
The Times last fall reported that there were complaints from brokers in Marsh’s Private Client Services group who said they were ordered to temporarily stop selling personal coverage lines from one insurer because doing so could reduce commission payments to Marsh.
Cherkasky declined to elaborate, saying only: “It’s activity that in the future we have to make sure we’re not engaging in.”
Spitzer said his investigation into insurance industry practices was continuing.
Regulators in other states, including California, have launched separate probes into the industry.
