New York Attorney General Eliot Spitzer today filed a lawsuitagainst Boston-based Liberty Mutual, alleging that the carrierparticipated in a pervasive bid-rigging scheme.

The civil complaint filed in State Supreme Court in Manhattanalleges that Liberty Mutual conspired with Marsh McLennan Cos. andother brokers in the scheme.

In a statement issued hours after the suit was announced,Liberty said it had tried to resolve the issue with the attorneygeneral, only to find his demands “excessive and unreasonable–bothin terms of magnitude and demands that would change legitimatebusiness practices in states outside their legaljurisdictions.”

According to the complaint, brokers and agents responded toLiberty Mutual's explicitly stated incentives, steering theirclients to the carrier and in many cases violating their fiduciaryduty to assist in finding the best insurance for the lowestprice.

The lawsuit also charges that Liberty Mutual repeatedly riggedbids for excess casualty insurance as part of an anti-competitivecustomer allocation scheme led by Marsh Inc. brokerage.

“It is simply appalling that a major financial institution wouldrig bids and induce brokers and agents to abuse their position oftrust with the insurance-buying public,” Mr. Spitzer said.

In its lawsuit, New York seeks disgorgement of Liberty Mutual'sillegal profits, restitution to injured policyholders anddamages–including punitive and treble damages for the company'sillegal business practices.

Mr. Spitzer said that from 2001 through 2004, Marsh repeatedlysolicited from Liberty Mutual and other insurers fake bids–called“B quotes”–that were intentionally higher or otherwise lessfavorable to the customer in order to “support” or “protect” thebid of a favored insurer.

Through this scheme, he said, “Marsh was able to deceive itsclients into thinking that the insurance policies and premiums itoffered were the result of true competition among insurers.”

In August 2005, a former Liberty Mutual executive, Kevin Bott,pled guilty to criminal charges in connection with his bid-riggingconduct while employed at Liberty Mutual.

In his plea elocution, Mr. Bott said that in many instances,“brokers at Marsh instructed me to submit protective quotes oncertain pieces of business where Marsh had predetermined whichinsurance carrier would win the bid…I understood that such quoteswere intended to allow Marsh to maintain control of the market andto protect the incumbent.”

The Liberty statement said two former lower-level employeesseriously violated “our trust and our standards of conduct in theirquotation activity.”

However, the carrier added, “allegations of wrongdoing regardingcommission payments and reinsurance brokering are incorrect.Liberty Mutual's conduct in both areas was appropriate andlawful…Liberty Mutual has a culture not just of compliance, but of'doing the right thing.'”

Liberty Mutual added that “despite cooperating with the attorneygeneral's investigations for nearly two years, we have been unableto reach a reasonable consensual resolution. Thus it is in the bestinterest of our policyholders and employees that we vigorouslydefend these allegations and allow the judicial process towork.”

The Spitzer suit is the latest chapter in the long saga thatbegan in October of 2004 with allegations of bid-rigging againstMarsh. The insurance broker–the largest in the world–eventuallysettled with Mr. Spitzer's office for $850 million.

The still unfolding scandal led to the major brokers abandoningcontingency commissions and several states adopting laws aimed atregulating broker compensation methods.