Marsh, 8 Other Brokers Sued For Racketeering

By Susanne Sclafane

NU Online News Service, Oct. 21, 4:04 p.m. EDT?Brokers not yet targeted by New York Attorney General Eliot Spitzer's price fixing inquiry have been accused of civil racketeering in a policyholder class action filed Tuesday charging 35 firms with a "massive scheme to manipulate the market for commercial insurance."[@@]

Racketeering charges contained in the suit filed at U.S. District Court, Manhattan, go beyond the allegations that brokers and insurers are facing in a civil suit filed by Mr. Spitzer last week charging that Marsh & McLennan's brokerage unit committed state law violations of fraud and antitrust by rigging bids with insurers in exchange for payoffs disguised as fees.

The class action complaint filed by OptiCare Health Systems Inc. on behalf of itself and other similarly situated plaintiffs names Aon Corp., Willis Group Holdings, Arthur J. Gallagher, Acordia, Brown & Brown, Hilb Rogal & Hamilton, BB&T Corp., U.S.I Holdings, and Hub International.

The Opticare complaint, amended and expanded from a complaint filed in August, which then named only Marsh, Aon and Willis Group as defendants, now adds bid rigging to earlier allegations centered on the use of contingent commission arrangements known as placement service or market service agreements.

The first firm to react through a press statement to news of the amended Opticare action was Chicago-based Hub, which said it is in the process of reviewing the complaint and that "the company intends to vigorously defend against the suit."

The class action, filed by the Waterbury, Conn.-based eye care services company, also names insurers American International, ACE, Hartford, and Munich-American Risk Partners.

In all, because the action separately names affiliates of the brokers and insurers, nearly three dozen names appear on the list of defendants.

Marsh and the insurers were named in Mr. Spitzer's suit last week, and each has since been buffeted by securities class actions lawsuits filed on behalf of investors in those companies, but the latest class action against the 35 defendants together is a policyholder action.

The New York law firm of Milberg Weiss Bershad & Shulman LLP, which also announced a securities suit against Marsh & McLennan on Monday, is serving as lead counsel for the policyholder action.

Although this is not the first such policyholder action filed this year, the charge of a conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act contained within it carries some severe potential implications. (Last summer, a Chicago judge gave class action status to a lawsuit alleging that contingent commission fees paid to Aon amounted to hidden "kickbacks.")

Peter Biging, an attorney for Lewis Brisbois Bisgaard & Smith in New York, LLP, discussed potential damages in policyholder class actions before news of the amended and expanded Opticare complaint broke. He said that plaintiffs in such actions could seek return of premiums above what the market prices should have been absent any bid rigging, disgorgement of the commissions that were allegedly illicitly obtained, and punitive damages.

"And if you can show that there is a pattern of this activity and it was engaged in over a period of years, and that it involved used of the mail or the wires like e-mails and faxes, there's a potential for a RICO claim which would give the victor entitlement to treble damages," he said.

According to Edith Kallas, an attorney for Milberg Weiss, while RICO allegations were in the original complaint, the amended complaint also adds antitrust allegations, which were not. The complaint also seeks relief for aiding and abetting, breaches of fiduciary duty, and unfair and deceptive trade practices among its 13 claims for relief.

Specifically, the amended complaint alleges that, based "on information and belief," the defendants were "engaged in a scheme, common course of conduct and conspiracy to steer insurance" from the insurers to the brokers' clients through "undisclosed" commission agreements.

As to bid rigging, described as "elaborate" and "pervasive," the complaint says the defendants created "the illusion of a competitive market" when in fact insurance products "are selected, priced and placed through defendants' collusion." (Emphasis included in complaint.)

The defendants thereby deprived plaintiffs of "independent and unbiased insurance brokerage services, as well as free and open competition in the market for insurance."

In addition to contingency fees, the Opticare complaint also refers in broad terms to fees paid to wholesale brokers by insurers "as part of the same fraudulent scheme."

"Some of these wholesale entities are subsidiaries or affiliates of defendants, while others are financially related to defendants by other means, with the result that wholesale payments are channeled to defendants in whole or in part," the complaint says, adding that like contingency, wholesale payments were not adequately disclosed to plaintiffs.

The references to wholesalers were in the original complaint, but the amendment added some specificity, Milberg representatives said.

Describing the RICO conspiracy, the complaint also throws "industry trade organizations" into the alleged far-reaching scheme, specifically referring to the Council of Insurance Agents & Brokers in the discussion of racketeering allegations. (The CIAB, however, is not among the defendants.)

The complaint says that the scheme doesn't just involve "individual broker defendants and insurers that pay them contingent fees and wholesale payments, but all broker defendants and insurers that pay contingent fees and wholesale payments to defendants and their affiliates directly or indirectly, industry trade organizations and other entities."

Ms. Kallas told National Underwriter that the law firm had intended to amend their complaint this week, even before Mr. Spitzer's recent revelations. Those, however, added specificity to the complaint, she said.

Mr. Biging, who specializes in defending brokers and agents against errors and omissions claims, said that plaintiffs and defendants each have some hurdles to overcome as these cases play out.

"To allege the existence of bid rigging, my sense is that you would need to have some kind of inside information," he said, noting that while the work of the New York attorney general's office provides some evidentiary foundation," it hardly can be said to, in and of itself, provide a factual basis for alleging that such conduct was being engaged in by other brokers."

"Fraud is an allegation that you need to plead with specificity. You can't say there's smoke over there, so there probably should be fire over here," he said.

He added, however, that "in an environment where there are such detailed specific allegations [laying out] a pattern of alleged fraud by brokers targeted by the New York attorney general, and perhaps the insurance commissioners of other states who are said to be conducting their own investigations and preparing their own complaints, judges who read this stuff are human too. They might be inclined to view the allegations with less of a jaundiced eye than fraud allegations are usually viewed with."

"Further," he noted, "it can theoretically be argued that there was some overall conspiracy that brokers joined in with, even if they didn't know the entire scope or identity of all of the participants, simply by agreeing to participate in accepting fees for placing business with specific insurers."

"With respect to damages, there's an interesting problem of proof. It's one thing to see if you can get this case off the ground?to come up with an allegation. It's another actually proving it," he said, noting that since excessive premiums are one element of the damages, plaintiffs must establish that there were other markets that you could have tapped to provide the same coverage at a lower cost. That's doable, but "it's not necessarily something that would be easy," he said.

For brokers and insurers, there are good defenses to the extent that PSAs were disclosed to the client, the client is aware of them and didn't have any objection to them. How can plaintiffs, "after the fact, say that this created some kind of a problem?" he asked. "They knew about it. In fact, these were well known to exist for many years. They are not new and various insurance commissioners were aware of them," he said.

"In fact, in many instances, brokers specifically alerted their clients to fees in writing," he said.

But "to the extent that there's actual evidence that a broker had an opportunity to obtain a lower bid, dismissed it and asked for a higher non-competitive bid, that's going to be difficult to defend directly, absent evidence that the coverage procured was more favorable, or the trust developed in the insurer, its claims handling practices, and tangible or intangible benefits of staying with the existing insurer outweighed cost considerations," he said.

In those instances, defenses would likely challenge proof of damages and also focus on statutes of limitations, he said.

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Marsh, 8 Other Brokers Sued For Racketeering

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