Gallagher Gets Green Light To Accept Contingency Fees

Arthur J. Gallagher has reached a nationwide agreement with the Illinois attorney general and insurance department permitting the brokerage to once again accept contingent commissions–a decision decried by the nation's top commercial insurance buyers group.

AJG was one of four brokers that agreed to drop contingency fees in 2004 after a New York investigation turned up evidence that volume-based bonuses paid to Marsh and other brokers served as a reward for rigging bids and steering commercial clients to certain insurers.

Marsh, Aon and Willis also agreed to stop taking the bonus commissions at that time, and that has not changed to date.

AJG, based in Itasca, Ill., revealed the agreement last week in its second-quarter earnings announcement, where it reported net income for the quarter up 7 percent over the same period last year.

The company said the agreement allows AJG to accept contingents beginning Oct. 1, and applies nationwide. Contingents are expected to add an estimated $10 million to the firm's earnings on an annual basis.

During a conference call with analysts, J. Patrick Gallagher Jr., the firm's chair, president and chief executive officer, said since the agreement was reached in 2004, he has been to the office of Attorney General Lisa Madigan 25 times to discuss the ban.

He said when AJG agreed to eliminate contingent commissions, it was with the understanding there would be an open discussion on the issue if the rest of the industry did not eliminate them.

"I probably, of the public CEOs, have been the most vocal when it comes to this dual regulation that we have lived in for so much time. We vehemently disagreed that contingent commissions were in any way illegal or immoral. We've said all along that we were willing to give them up if the rest of the industry was going to follow," said Mr. Gallagher.

"That really was the sentiment I had with the AG's office four years ago, and I'm very pleased that our attorney general and director of insurance–once they recognized that in fact the industry standard for contingent commissions was not going to change–they agreed it would be unfair to leave us in a situation where we could not collect them," he added.

He said the major component of the agreement is AJG will operate on a fully transparent basis, disclosing all its compensation to clients–something, he added, that has not been universally accepted by the brokerage community.

The estimated $10 million in contingent commissions will apply to relationships with small regional carriers who were unable to pay supplemental commissions to the firm, said Mr. Gallagher. It also means an additional $12 million in contingents the company was collecting from acquired agencies will not be lost.

The Risk and Insurance Management Society said it is "disappointed" with the lifting of the fee ban.

"RIMS has consistently stated that contingent commissions should be broadly prohibited as they represent an inherent conflict of interest," the association said in a statement. "The investigations, admissions and fines that culminated in the agreement signed by some brokers in 2005 prove that these practices can be, and were, manipulated to the detriment of the insurance consumer."

While expressing "concern" over the decision by Illinois officials, Terry Fleming, RIMS vice president and director of the division of risk management at Montgomery County, Md., said "we hope that full disclosure of all forms of compensation will be provided to the insurance buyer in a timely manner. This will allow the consumer to determine whether the broker is acting in their best interest, before binding the contract."

Marsh Chair and CEO Dan Glaser said in a statement that his firm "has consistently advocated for a level playing field. Marsh continues to believe that the Settlement Agreements should sunset, and that a clear set of rules grounded in transparency should apply equally to all insurance producers."