NU Online News Service, May 19, 6:00 p.m. EDT–Insurance broker Arthur J. Gallagher has reached a $27 million settlement with Illinois regulators investigating the company for suspected steering of customers in return for undisclosed fee arrangements with insurers.
Coinciding with the announcement of the agreement regulators released e-mails of Gallagher managers pushing staff to channel business to carriers they had incentive fee deals with.
J. Patrick Gallagher Jr., president and chief executive officer of the Itasca, Ill.-based insurance brokerage firm, in an analyst's conference call, said he hoped the agreement, which is national in scope, would satisfy all other outstanding investigations by 20 other agencies including attorneys general and insurance regulators.
Under the agreement, which appears similar to those reached by the three other major insurance brokerage firms, Marsh, Aon, and Willis, with New York Attorney General Eliot Spitzer, the firm will pay the $27 million into a fund on Jan. 16, 2006. The fund will pay clients whose insurance placements were rewarded by contingent fees insurers paid to the broker. No portion will be used to pay legal costs.
Under the voluntary agreement, Gallagher admits no wrongdoing or guilt.
Mr. Gallagher said there was no evidence of "bid-rigging, leveraging, no play-for-pay arrangements," and "no findings that clients were disadvantaged."
He said, "while we have disclosed our contingent arrangements since 1999, the AG felt that those disclosures could potentially lead to a conflict of interest."
However, in a statement, Illinois State Attorney General Lisa Madigan, and Michael McRaith, the Division of Insurance director, said an investigation showed that Gallagher, considered the fourth largest firm in the world, accepted contingent fees in exchange for steering clients toward favored companies.
"Our comprehensive investigation revealed Gallagher sought and obtained huge payments from insurers in return for steering them enough business to meet secret threshold targets," said Ms. Madigan.
Ms. Madigan said that while the firm did disclose the existence of contingent commissions, by not revealing the full arrangements, it created a conflict of interest.
Mr. Gallagher acknowledged the attorney general's opinion on the potential conflict of interest.
"As a young manager, and ultimately as the CEO of the company, I am unaware of any of us asking or ordering anyone to do something detrimental to a client's best interest," said Mr. Gallagher.
In addition to the payment, Gallagher also agreed to:
o Eliminate all contingent commissions (which it did as of Jan. 1).
o Disclose all compensation for services to retail clients, including wholesale commissions.
o Provide training in ethics and compliance to employees and issue written standards companywide.
o Create an independent compliance committee.
o Not to accept any payments or gifts of $500 or more from an insurer, except commissions as part of the normal course of business.
o Maintain a record of complaints on compensation.
o File annual reports with the state agencies for three years.
A Gallagher spokesperson would not comment on whether the loss of contingent commissions would result in layoffs at the firm as has been the case among the other three major brokerage firms.
As part of a form 8-K filing with the Securities and Exchange Commission, the Assurance of Voluntary Compliance detailed some of the activity Gallagher was accused of participating in. In it, the attorney general's office cited a number of written communications on the subject.
In one note dated late-1990s, said the attorney general, Walter F. McClure, chairman of Gallagher's Brokerage Service Division, approved a performance goal for a branch manager, stating, "Maximize contingency opportunities and steer business to hit target thresholds."
In a confidential memo from Craig Van der Voort, then the Branch Manager of Gallagher-Great Lakes, Inc., dated Feb. 27, 1997, he described the need to "push" business to The Hartford.
"None of these offices would have received any Hartford bonus in 1997 had it not been for the fact that we pushed to write about $400,000 new [business]," the exhibit said.
In another memo Mr. Van der Voort wrote to managers directing them to "direct" business to Chubb.
"Contingent income and 'side' bonus payments from various markets is an extremely important source of revenue to our branch," it read.
Gallagher said it has not received any subpoenas from New York's attorney general but did receive a request for information from the state's insurance department.
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