William Gallagher Associates (WGA) has settled a suit with the Massachusetts attorney general over a scheme to mask brokerage fee charges as premium payments.

The Boston-based company, which is not affiliated with Itasca, Ill.-based Arthur J. Gallagher, agreed to return more than $3 million to 11 clients and pay $925,000 in sanctions and attorneys fees to the state.

The brokerage firm also agreed to a binding audit of its Energy and Environmental Practice group, where the overcharges allegedly originated.

The company will also mail out over 700 statements to customers to "correct prior allegedly false representations the company made regarding its employees' knowledge of contingent commissions and WGA's participation in reinsurance."

"This investigation revealed certain deceptive practices that inflated insurance costs for numerous businesses," said Massachusetts Attorney General Martha Coakley, in a statement. "In addition, the relief set forth in this consent judgment adds needed transparency and fair dealing for businesses seeking various insurance coverages."

"We are very pleased with the outcome of this matter," said William Gallagher Associates, in a statement on its Web site. "The outcome of this investigation is a confirmation of WGA's continued commitment to transparency and fair dealing with clients."

According to the attorney general's complaint, filed in the Trial Court of Massachusetts Superior Court in Suffolk County beginning in 2001, the brokerage firm charged customers fees without disclosing them. Instead, the fees were tacked onto the client's premiums as one charge. The additional fees were never disclosed to the customer.

In one case, Milford Power received an excess property insurance coverage for $3.69 million in premium. WGA added on $1.41 million in fees to the premium bill for a total charge to Milford of $5.09 million, without telling the client that this amount included the more than $1 million fee.

To cover up its scheme, the company ran two sets of invoices--one to the customer and one internal--to keep track of the charges. The company also allegedly did not disclose how much it was making in commission from the transactions.

In 2004, when customers at WGA were asking questions about the company's contingent commissions--after New York Attorney General Eliot Spitzer began his own pursuit of kickbacks and steering of insurance contracts by brokers--the complaint says customers were misled into believing account executives were not aware of the payments.

In fact, the complaint says, the executives very well understood the contingent commission arrangements, and in some cases took part in negotiating the payments.

While the complaint does not say the broker steered accounts to certain insurers, it does say that placements put pressure on producers to keep business with certain carriers. Chubb was singled out as one carrier which loaned the broker $3 million under the agreement, with the understanding that the loan and interest would be forgiven under the broker's contingent fee agreement.

WGA also failed to disclose a reinsurance equity interest in a Chubb-sponsored reinsurance program. The relationship was not disclosed to over 100 affected clients creating a conflict of interest, the suit said.

WGA said the suit and agreement were the result of the company's own internal investigation that it shared with the attorney general. The AG's review took there years, WGA said.

"WGA was found not to have committed any violations involving bid-rigging, illegal kickbacks, reinsurance brokerage tying, or finite reinsurance," the company said in its statement.

In its letter to be sent to clients, WGA will apologize for its actions, and adds that the three employees involved in the scheme left the company. In a separate statement, the firm said they left in early 2005.

A spokeswoman for the Attorney General's office said she could not comment on whether there are any ongoing criminal investigations.

Special Reports /

William Gallagher Associates Settles Mass. Premium Suit

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