As state regulators probe alleged misconduct in the insurance industry, California’s largest auto insurance broker is being accused of funneling millions of dollars in sales to a single insurer in exchange for commissions.
A lawsuit claims that Bay Area-based Auto Insurance Specialists, which does business throughout Southern California, put its own financial interests ahead of those of its customers by collecting undisclosed “contingent commissions” on policies written for Mercury General Corp., a top-selling auto insurer.
The suit is the first in California to extend allegations leveled against commercial insurance brokers to so-called personal-lines brokers, which sell individual auto and homeowner policies.
In October, New York Atty. Gen. Eliot Spitzer filed suit against Marsh & McLennan Cos., claiming that sales personnel at the world’s largest insurance brokerage received secret commissions in return for steering business policies to certain insurers.
Spitzer’s widely publicized move spawned investigations by insurance regulators in at least half a dozen states, including California, where Insurance Commissioner John Garamendi’s department is monitoring the suit against Auto Insurance Specialists.
Insurance industry executives characterize the suit, filed by three auto insurance buyers, as baseless grandstanding. They note that it’s not illegal in California for insurers to pay contingent commissions based on the volume or profitability of business that a broker brings, and that state law doesn’t require that brokers tell customers about such payments.
“They’re trying to take advantage of the existing publicity,” said Mike Mattoch, an insurance industry lobbyist in Sacramento.
The lawsuit against Auto Insurance Specialists, a wholly owned subsidiary of Chicago-based Aon Corp., was filed in San Francisco County Superior Court in September 2003. At that time, the plaintiffs’ claim was that Auto Insurance Specialists had illegally charged broker fees to customers buying auto coverage.
This month, the suit was amended to include allegations about the commissions. Plaintiffs’ attorney Norman Goldman said he learned about the commissions when he questioned Auto Insurance Specialists executives during discovery interviews.
“This case is important because Mercury and Aon have an extremely close working relationship that they both have kept hidden from California automobile insurance consumers,” Goldman said.
The lawsuit claims that the commissions were paid on more than $150 million of policies sold by Los Angeles-based Mercury General since 1990.
As a broker, Auto Insurance Specialists was obligated to shop around to make sure its customers were getting the best possible coverage for their money, instead of simply directing business to Mercury, Goldman said.
The suit doesn’t cite any cases of consumers buying overpriced policies. Indeed, Mercury has earned a reputation for being a low-cost provider in the California auto insurance market.
The plaintiffs, who are seeking class-action status for their suit, are asking the court to bar Auto Insurance Specialists from accepting commissions. They also want the company to return profit earned from commission-related business.
Mercury General Chief Executive George Joseph said last week that the company had never tried to hide the contingent commissions paid to Auto Insurance Specialists. After Spitzer’s investigation was made public, Joseph said, Aon told Mercury that it would no longer accept contingent commissions from insurers.
Aon spokesman Al Orendorff declined to comment on the lawsuit.
The origins of the Auto Insurance Specialists case can be traced to an earlier lawsuit filed against Mercury by Goldman and co-counsel Arthur Levy of San Francisco. That complaint alleged that the insurer illegally converted its appointed agents into independent brokers, who then collected large broker fees from customers.
Mercury lost that case, and the state Supreme Court recently refused to hear the insurer’s appeal. As a result, Mercury is in discussions with the California Department of Insurance about making possible changes in its sales practices.
Meanwhile, Insurance Commissioner Garamendi is investigating broker practices, focusing on the payment of contingent commissions to both commercial and personal lines brokers. Atty. Gen. Bill Lockyer is conducting his own investigation, concentrating on brokers that sell commercial insurance to businesses, spokesman Tom Dresslar said.
Garamendi has filed and settled one lawsuit with a commercial employee benefits insurance broker in San Diego. The commissioner is pushing for rules that would require brokers to fully disclose to customers all contingent commissions received from insurers.
The proposed rules, opposed by the industry, would hold brokers legally accountable for securing insurance buyers the best available coverage for their needs.