Suit Says Insurers Bribing Small Brokers

By Daniel Hays

NU Online News Service, May 18, 4:19 p.m. EDT?A California case involving charges that major insurers paid small brokers "bribes or kickbacks" has drawn the interest of several state insurance regulators, an attorney on the case said today.[@@]

The revelation from Finley Harckham, a partner in the New York law firm of Anderson Kill & Olick, follows the disclosure yesterday that a New York Attorney General's Office inquiry into controversial contingency fees received by larger brokerages has led to a subpoena for Chubb insurance company.

Discussing the California case, which is now in the evidence-gathering, pre-trial discovery stage, Mr. Harckham said the case is being brought under California law that allows public interest lawsuits. In this case, the action on behalf of policyholders attacks big insurers for their dealings with "all the little brokers who do [service] the mom and pops [businesses] and individual consumers," he said.

Insurers named as defendants include Allianz, American International Group, Continental, Chubb, The Hartford and a number of their subsidiaries.

The complaint in San Francisco Superior Court alleges that insurers made undisclosed payments to small brokers that "serve, in effect, as bribes or kickbacks providing a strong monetary incentive to the included brokers to act contrary to the best interest of their policyholder clients..."

"The effect of the payments is to reward brokers for generating the largest possible sales of insurance from defendants, rather than competing insurance companies, including sales of inappropriate or excessive amounts of insurance, and for assisting the defendants in minimizing claims payments to policyholders," the complaint states.

In relation to the suit, Mr. Harckham said that earlier this year his office was "contacted by various regulators" from two states. He would not identify them. However, the California Insurance Department has announced it is examining broker contingency fees, and Arthur J. Gallagher brokerage said the New York Insurance Department asked for information about the fees.

In the course of investigating the case, Mr. Harckham said that he knew of incidents "where smaller brokers switched the book of business from one carrier to another because they got a better contingent fee arrangement." He said that under the law, the case can be expanded into a class action.

The suit names no brokers as defendants, and states specifically that it does not involve the major brokerages--Marsh, Aon and Willis--which were a past target for a contingency fee lawsuit by Anderson Kill that was settled out of court, with no details made public.

Steve Young, general counsel for the Insurance Brokers & Agents of the West in Pleasanton, Calif., said the group was far more concerned by the New York and California investigations than by the Anderson Kill suit, which was filed in 2001.

"What happens at the largest levels of the brokerage community is different from the average rank-and-file broker case," Mr. Young said.

Regarding the allegations of misconduct brought on by fees, he said he thought there was no evidence to support such claims, and that the similarity of coverage forms and a brokers' exposure to errors and omissions claims would prevent such activity. Given proper disclosure, fees are "appropriate and reasonable for insurers," he said.

Yesterday, Warren, N.J.-based Chubb announced that it has been issued a subpoena by the office of New York Attorney General Eliot Spitzer in his inquiry into the fees. A representative said there would be no comment on the San Francisco case while it is pending. AIG in New York and the Allianz subsidiary--Fireman's Fund in Novato, Calif.--also withheld comment.

The Hartford did not respond to the allegation that the fees cause brokers to act against the best interests of their clients, but said they are longstanding common practice and the company has no objection to disclosure of the compensaton arrangments to customers.

Meanwhile, in Chicago, a case in the discovery process charges that Arthur J. Gallagher violated its fiduciary duty when it didn't disclose or pass on contingency fees to the Village of Orland Hills, a Chicago suburb that secured bond coverage through the brokerage.

That case is a prospective class action and, if the suit were successful, would be worth "tens of millions," according to Chicago attorney Christopher Stuart, who, along with Harvey Barnett of the Much, Shelist law firm, is representing the village. AJG did not respond to a request for comment.

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Suit Says Insurers Bribing Small Brokers

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