Marsh & McLennan to pay $850 million to end insurance probe

Published: Tuesday, February 1, 2005 at 6:01 a.m.
Last Modified: Monday, January 31, 2005 at 11:54 p.m.
ALBANY, N.Y. - The nation's largest insurance brokerage will pay $850 million in restitution to end New York Attorney General Eliot Spitzer's investigation into bid rigging and price fixing in a settlement the company hopes will end other states' probes and private lawsuits.
Marsh & McLennan Companies Inc. will provide restitution over four years to clients, most of which were corporations.
The payout will include $130 million to customers in California, $94 million to New York clients, $58 million in Pennsylvania and $55 million to Texas clients.
Companies that accepted the payment would agree not to sue Marsh.
''It is one of the largest restitution funds in history that we are aware of from a single company,'' Spitzer said.
''We are establishing new ethical ground rules for this industry.''
Marsh & McLennan, which is based in New York, also issued an apology calling its conduct ''unlawful'' and ''shameful,'' Spitzer said. And the company will publicly promise to adopt reforms, he added.
''We are ashamed at what a few, of amongst the tens of thousands of Marsh employees, have done to our clients, their fellow employees, the shareholders and our company,'' said Marsh President and Chief Executive Officer Michael G. Cherkasky.
''The cost is significant, but if it can help the healing process, assist us in restoring trust with our clients - and we believe it will - then it is an investment that, in the end, will be well worth it and make us a much better company.''
Marsh shares rose $1.30, or 4 percent, to $32.39 in midafternoon trading on the New York Stock Exchange.
Marsh was sued in October by Spitzer, who is seeking the Democratic nomination for governor next year. That suit also implicated American International Group and several other major insurance companies.
Spitzer said brokers took payoffs from insurance companies to steer corporate clients their way rather than get the best prices for policies, as they are required. AIG declined comment.
The agreements - also known as contingent commissions or placement service agreements - are above ordinary commissions which brokers legally receive from insurance companies.
Spitzer said other companies may feel compelled to match Marsh's new practices which he said go beyond guidelines recently issued by the National Association of Insurance Commissioners.
The company has changed its leadership to include Cherkasky, the managing director of the board, and 10 outside directors.
After the suit was filed, Marsh ousted Chairman and Chief Executive Officer Jeffrey Greenberg and named Cherkasky, 54, as president and CEO. Cherkasky had been head of Marsh Inc., the company's insurance brokerage unit. Earlier in his career, Cherkasky spent 16 years in the criminal justice system, some of them as Spitzer's boss in the New York district attorney's office.
In late October, Marsh announced that it was permanently eliminating the practice of receiving any form of contingent compensation from insurance companies. A number of property and casualty insurance companies announced that they wouldn't pay such incentive fees anymore.
The state Insurance Department filed citations against Marsh after Spitzer's suit.
Spitzer argued in his civil suit that Marsh collected $800 million in so-called contingent commissions in 2003 alone. Spitzer also accused the company of soliciting rigged bids for insurance contracts. The practices go back to at least the 1990s, he said.
Spitzer said the practice raises every policy holder's premiums. He said that when he first contacted Marsh executives about his concerns, the former executives told him, ''Don't waste your time.''
Even Monday, Cherkasky said the practices neither increased rates nor harmed clients. He said the proof of that is that Marsh faces no fines or penalties.
''It was certainly critical to us,'' he said of negotiations that ended Sunday evening. ''It was just so important that it go back to our clients ... we wanted to send a message that this is not any way to try to give states a recovery.''
Earlier this month Connecticut Attorney General Richard Blumenthal sued Marsh, accusing the company of illegally steering an $80 million state contract to ACE Financial Solutions Inc.
Cherkasky said he and other executives have been discussing the settlement with other states' officials, too.
The company will compensate domestic clients who bought Marsh policies with inception dates from Jan. 1, 2001, to Dec. 31, 2004, if the policies resulted in the contingent commission overrides. Clients will get a piece of the fund based on the premium and the amount of estimated Market Service Agreement revenue recorded by Marsh in that period. Clients won't have to prove harm.
This is the latest industry settlement for Spitzer. In recent years, he uncovered conflicts of interest on Wall Street and improper trading in mutual funds.
The payout will include $130 million to customers in California, $94 million to New York clients, $58 million in Pennsylvania and $55 million to Texas clients.

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