Gallagher Drops Incentive Fees, Gets Subpoena

Arthur J. Gallagher announced last week that it will end the practice of taking contingency commissions as a retail broker by the beginning of next year and that it has received a subpoena from Connecticuts attorney general concerning possible antitrust violations.

The Itasca, Ill.-based insurance broker said Connecticut seeks information concerning possible violations of the states antitrust laws in connection with the solicitation of bids for insurance.

Connecticut Attorney General Richard Blumenthal said he was conducting his own investigation based on complaints from risk managers in the state back in May, a few months after New York Attorney General Eliot Spitzer started his own investigation.

During an analysts conference call, J. Patrick Gallagher Jr., president and chief executive officer, said the firm has not received a subpoena from Mr. Spitzer in his probe of contingency fees.

He emphasized that Gallagher is different from the global brokersMarsh, Aon and Willisin that its business is the middle-market and negotiations are done through decentralized field offices. Because of this, Gallagher does not exert the kind of leverage on accounts that enabled executives at Marsh to allegedly manipulate the placement of accounts in return for contingency fee commissions, he said.

Mr. Gallagher said that the firm has had an auditing process in place for over a decade to ensure that each office is abiding by the companys policies of honesty and integrity. The firm has hired outside counsel to make an internal review to ensure the firms policies have been followed.

When asked during the conference call what the fallout will be for the industry and if Gallagher would benefit from Marshs misfortunes, Mr. Gallagher said: “It is too early in the game to see how this all shakes out,” adding that he did not want to comment on his competitors.

Through Sept. 30, Gallagher said it collected $31.7 million in contingency fees, accounting for less than 3 percent of revenues. It said $5.1 million of those fees were in non-retail business, managing general agency and program administration contracts, which Mr. Gallagher said he believes his firm would be able to retain. He did not say how the firm would make up the loss in contingency fee revenue.

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Gallagher Drops Incentive Fees, Gets Subpoena

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