Gallagher Sees No Quick End To Litigation

By Mark E. Ruquet

NU Online News Service, April 27, 4:09 p.m. EDT?The head of Arthur J. Gallagher & Co. said while the insurance broker has reserved $35 million for settlement and litigation costs related to improper contingent fee activity, the firm has no idea when a settlement will be reached.[@@]

Discussing its first-quarter results for 2005, the Itasca, Ill.-based insurance broker said today it was putting aside the $35 million based on a formula it believes was used by authorities to reach settlements after investigating three large brokerages.

So far, major insurance brokers Marsh & McLennan, Aon and Willis have paid a total of more than $1 billion to settle the inquiries that began last year in New York concerning brokers improperly steering clients to insurers who paid incentives known as contingency fees.

Gallagher, regarded as the fourth largest broker in the world, ceased taking contingent commissions at the beginning of this year but is still receiving contingent fees it had contracted in 2004. The receipt of those fees amounted to $20.7 million in the first quarter.

J. Patrick Gallagher Jr., president and chief executive officer of Gallagher, said the firm is subject to 22 state inquiries from either state attorneys general or departments of insurance, 12 class actions suits, and one shareholder suit.

"In the end, we don't know what the cost of litigation will be or when it will be resolved," he said during the investors' conference call.

Mr. Gallagher would not elaborate on any of the investigations, noting that he did not want to say anything that could affect any negotiations. "If we can find a way to put this behind us we will do so," he added.

Gallagher also announced it would take an additional charge of $131 million to settle litigation between its synthetic fuel unit and Headwaters Inc., a provider of technology to the energy industry. The litigation arose over the use of a system in the production of synthetic fuel that Headwater claimed was its patented technology. In February, a jury awarded Headwaters $175 million.

The broker said it reached an agreement with Headwaters to settle the dispute for $50 million and pay an additional $70 million on an existing licensing agreement. There would also be future royalty payments.

Gallagher reported that the charges resulted in a loss of net income for the quarter of $74 million, or 80 cents per share, compared to a gain of $39 million, or 41 cents a share, during the same period in 2004. The loss was on an increase in revenue of 5 percent, or $16 million, going from $333 million in 2004 to $349 million.

Brokerage and risk management grew 12 percent in the first quarter, going from $284 million in 2004 to $317 million.

Mr. Gallagher said many of the company's accounts are seeing decreases of 10 percent or more, and as far as the firm is concerned, it is firmly entrenched in a soft market.

"We are clearly running up a down escalator," he said.

On the positive side, customers are increasing their insurance coverages, and insurers are increasing their commissions, which they cut during the hard market.

He said the firm's management is experienced in dealing with this market turn, and he expected the firm to successfully work through it, remarking that he was happy to get past the first quarter.

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Gallagher Sees No Quick End To Litigation

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