Marsh-Spitzer Settlement Struck, But MMC Woes Not Over Yet

There seemed to be a sigh of relief in some circles after Marsh & McLennan Companies Inc. signed an agreement ending New York's efforts to penalize the company for alleged bid-rigging and contingency fee abuse, but its troubles are far from over, warn those representing future plaintiffs.

New York-based MMC cut a deal with New York Attorney General Eliot Spitzer and the state insurance department to pay $850 million into a restitution fund over a four-year period. The money will go directly to clients whose accounts earned MMC's insurance brokerage firm, Marsh, lucrative profits via contingency fee deals. (Details of the agreement appear on page 7.)

The number of clients affected by the settlement could reach as high as 100,000, but that figure has yet to be calculated, according to Barbara Perlmutter, senior vice president of public affairs for MMC.

After the announcement, MMC's stock rose after having lost half its market value last October when Mr. Spitzer filed a civil suit against the company for allegedly abusing contingency fee deals based on volume placed with selected carriers. Insurers allegedly submitted false bids to create the illusion of true competition for unwitting policyholders.

Declaring that the company was clearing a hurdle so it can move forward, Michael Cherkasky, president and chief executive officer of MMC, said the agreement would make the firm the leader in the industry when it comes to disclosure. MMC issued a letter of apology for the actions of a few of its employees, but no admission of guiltan important legal distinction to protect MMC in the future, Mr. Cherkasky said.

Two stock analystsBrian Meredith at Banc of America and Vinay Saqi with Morgan Stanleysaid the agreement appeared favorable to the broker, expressing the view that MMC should have little trouble with the payment schedule.

Insurer rating agencies, on the other hand, gave mixed reviews. Moody's Investors Service said it was continuing its review of MMC with an eye at a downgrade. Fitch Ratings, on the other hand, removed MMC from “Rating Watch Negative,” but kept a negative outlook.

The settlement talks, according to New York's acting insurance superintendent, Howard Mills, came to a head on Jan. 30 in a conference between MMC, Mr. Spitzer's office and the insurance department. “From my point of view and others, the number-one concern was to see that the aggrieved parties get compensated,” he said. “The fund clearly has done that.”

There were no fines or other payments to the state charged against MMC, he said, because as a New York employer that has already shed 3,000 jobs due to the financial fallout of the scandal, the government did not want to cripple the company.

Mr. Mills said he has received indications from other insurance regulators they are comfortable with the settlementbut that is no guarantee other states will cease their investigations, he added. Mr. Mills went on to say that the deal has the potential to become a model for the rest of the industry on transparency.

Diane Koken, president of the National Association of Insurance Commissioners and Pennsylvania's insurance commissioner, said the agreement “is going to go far toward restoring the confidence level of consumersWhenever there are allegations that clients are being deceived, it impacts on the level of trust that consumers would have for the industry.”

The settlement “closes a troubling chapter in the industry's recent history,” said Ken Crerar, president of the Council of Insurance Agents and Brokers, of which Marsh is a member. “Now it's time to focus back on the client and the trust relationship.” However, representatives at the Washington-based CIAB pointed out that Congress is keeping a close eye on events, which could affect the shape of future legislation impacting the insurance industry, including federal regulation and extension of the Terrorism Risk Insurance Act.

David Bradford, executive vice president with the New York-based consulting firm Advisen, Ltd., which has surveyed brokers on this issue and which does work for the leading corporate insurance buyers group?the Risk and Insurance Management Society?said a settlement does not come as a surprise, but the amount was slightly higher than some expected. However, this does not end MMC's troubles, he added.

“They still have to deal with other suits and are not off the hook with other states. This is step one,” he noted. “There is a lot to be resolved yet.”

Kenneth L. Adams and Elaine Metlin, attorneys with the law firm Dickstein Shapiro Morin Oshinsky LLP, with offices in Washington and New York, said they are counseling about a dozen Fortune 500 companies on what to do with the settlement, which requires any buyer accepting restitution funds to drop any civil litigation. “They feel injured by Marsh,” he said.

What clients don't know is how much more they paid for their insurance because of the alleged abuse, and how much of that figure would be reflected in the settlement, he said. The settlement, he pointed out, might work out to only 25 percent or less of the damage they incurred. “Right now it is hard to evaluate and know if this is a reasonable settlement or not,” he added.

The allegations have also made clients suspicious of their brokers, Ms. Metlin contends. “It?s hard to believe that Marsh was the only one doing it,” she said. “[Other brokers] may not have engaged in bid-rigging, but tying and steering is suspect,” she added, referring to deals in which a broker “steers” a risk to a carrier to collect on a contingency fee, or “ties” a primary placement with its subsequent reinsurance transaction.

However, the announced settlement should work to minimize any future civil litigation against Marsh, according to Eugene A. Spector, an attorney and partner with Spector, Roseman & Kordroff, PC, in Philadelphia. He equated the settlement strategy to some of the federal government?s efforts to roll class-action claims into one settlement. But Marsh is a long way from such a resolution, he observed, because the suits still cropping up throughout the country have yet to be consolidated into a single class action.

“This is not the end of the civil litigation at the least,” he said.

With additional reporting by Daniel Hays and Matt Brady.

Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 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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Marsh-Spitzer Settlement Struck, But MMC Woes Not Over Yet

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