Following a breakdown in settlement negotiations, New YorkAttorney General Eliot Spitzer filed a civil lawsuit againstLiberty Mutual, alleging that the carrier participated in apervasive bid-rigging scheme with some of its top brokers.

The civil complaint–filed in State Supreme Court inManhattan–alleges that Liberty Mutual conspired with brokers fromMarsh and other intermediaries in a scheme to steer business itsway in return for volume-based contingency fees.

In a statement issued hours after the suit was announced,Boston-based Liberty Mutual said it had tried to resolve the issuewith the attorney general, only to find his demands “excessive andunreasonable–both in terms of magnitude and demands that wouldchange legitimate business practices in states outside their legaljurisdictions.”

According to the complaint, brokers and agents responded toLiberty Mutual's explicitly stated incentives by steering theirclients to the carrier–in many cases violating their fiduciary dutyto assist in finding the best insurance for the lowest price.

The lawsuit also charges that Liberty Mutual repeatedly riggedbids for excess casualty insurance as part of an anti-competitivecustomer allocation scheme led by accomplices at the 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 from any allegedly rigged placements, restitutionto injured policyholders and damages–including punitive and trebledamages for the company's illegal 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 carrier.

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 [carrier].”

The Liberty Mutual statement said two former lower-levelemployees seriously violated “our trust and our standards ofconduct in their quotation activity.”

However, the carrier added, more widespread “allegations ofwrongdoing regarding commission payments and reinsurance brokeringare incorrect. Liberty Mutual's conduct in both areas wasappropriate and lawful…Liberty Mutual has a culture not just ofcompliance, 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 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.