The Contingent Commission Lawsuit
Prof. Bill Long 9/13/06
Exposing Collusion between Insurers and Marsh McLennan
The purpose of this essay is to review the complaint filed by NY Attorney General Elliott Spitzer against insurance broker Marsh McLennan ("MM") on Oct. 14, 2004 for the following causes of action: (1) fraudulent business practices; (2) antitrust violations; (3) securities fraud; (4) unjust enrichment; and (5) common law fraud. The complaint arose out of a six month investigation of MM's "contingent commission" program for allegedly receiving commissions (kickbacks) from insurance companies when it placed insurance business with them. The next essay describes the fallout from the lawsuit in 2005 and early 2006.
MM, with more than 42,000 employees in 100 countries, is the largest supplier of insurance brokerage services in the world. This means that it represents itself as the agent of insurance-buying companies. It seeks to find and tailor an insurance plan to the needs of a particular business or enterprise. For this service two kinds of money is exchanged. First, the business pays an amount of money to MM for a commission for its work in securing insurance. Second, the business pays its premiums for the insurance secured. The heart of the complaint against MM was not for this standard service, but rather for the following:
"Since at least the late 1990s, Marsh has designed and executed a business plan under which insurance companies have agreed to pay Marsh more than a billion dollars in so-called “contingent commissions” to steer them business and shield them from competition. Styled as payments for nebulous “services,” the agreements to pay these commissions were called “placement service agreements,” (“PSAs”) and, most recently, “market services agreements” (“MSAs”), by Marsh" (Complaint, par. 7).
In other words, the complaint states that a third kind of payment was exchanged in the securing of insurance contracts and that was a payment from the insurer to Marsh to steer business in its direction. The complaint goes on to say that this business plan was immensely profitable for MM. In 2003, for example, when MM announced a profit of nearly $1.5 billion, more than half of that amount ($800 million) consisted of contingent commissions. This amount was, in fact, the lifeblood of the profitability of this immense firm. Spitzer's complaint not only detailed the plan whereby MM would get these commissions but also the retaliation practiced against insurers and employees who questioned whether this was the ethical or legal route to pursue.
At the heart of MM's plan, as Spitzer alleged, was its "rating" of insurance companies. As the complaint alleges:
"In addition, Marsh began internally rating the insurance companies based on how much they paid Marsh pursuant to their contingent commission agreements. In February 2002, a Marsh Global Broking managing director in the Healthcare group provided nine of his colleagues with a list of the insurance companies that were paying Marsh pursuant to contingent commission agreements. He cautioned, however, that “Some [contingent commission agreements] are better than others,” and said that soon Marsh would formally “tier” the insurance companies. Then, he said, “I will give you clear direction on who [we] are steering business to and who we are steering business from.” [Marsh-NY 17870]" (par. 33).
Problems with Contingent Commissions
This plan was legally problematic in two ways. First, "a client relies on Marsh to make these calls (i.e., with whom to place insurance) strictly based on the client's best interest, without the corrupting influence of incentive payments." And, "second, insurance carries pass the cost of contingent commissions directly on to the clients in the form of higher premiums" (par. 42). Then the complaint goes on to show how some of the world's largest insurance companies, among them AIG, Ace Bermuda, Hartford and Munich-American Risk Partners were implicated in this scheme.
One of the examples laid out in the complaint (which I also mention in the next essay) was the Greenville (SC) County School Project. In the 1990s, Greenville experienced unexpected growth in numbers of students. So it raised money, hired a program manager for a massive building project and then hired MM to secure insurance for the project. MM provided material showing how it was a "trusted business advisor" of its clients. Two serious bidders competed for the business, Zurich North America and ACE. MM held out the Greenville project as a "carrot" in order to entice Zurich to sign a contingent commission agreement. Later in the process MM even went so far as to submit a dummy bid from CNA, when CNA had refused to participate in the process, so that it would "look" competitive. As it was, Zurich got the contract with the school district. Though no contingent commission agreement was ever signed with Zurich, this kind of deal was typical, so the complaint alleged, of the way that MM operated.
When this news hit the street on October 14, 2004, opinion was divided about whether Spitzer would prevail. But storm clouds quickly gathered against the insurers, and within three months they announced a settlement by which MM would disgorge more than $800 million to pay to policy holders. As Spitzer made clear in his remarks announcing the settlment, not a penny of it went to the state of New York--all would be returned to the insured.
Though Elliott Spitzer was a crusading AG for New York for several years, it is this issue that helped launch his gubernatorial campaign in the Empire State. He is the Democratic nominee for Governor in 2006. Most likely he will win. I wouldn't be surprised, then, if you see the name Elliott Spitzer on a national ticket for the Democratic party sometime around 2012. But now you have heard of him, well before he has become a household word.
The next essay describes the "fallout" from the lawsuit.
Copyright © 2004-2007 William R. Long