Wall Street Journal Reports:

"Insurers Reel From Spitzer's Strike—Subpoena on Bid Rigging
Spurred Rush to Admit Collusion With Broker"

On October 18, 2004, the Wall Street Journal and other national media reported that the New York Attorney General filed a criminal complaint against individual corporate managers of one of the world's largest insurance companies, AIG, and a civil complaint against the world's largest insurance broker, Marsh & McLennan Cos. The actions charge a widespread practice of bid rigging where policy providers allegedly paid kickbacks in the form of "contingent commissions" to brokers who steered business their way.

The New York Attorney General described the legal actions outlined in the complaint as being "the tip of the iceberg," reflecting industry-wide practices that involve nearly every type of policy coverage from general liability to worker's compensation. The complaints allege that Marsh routinely received substantial deferred compensation, also known as "contingency commissions," based upon the volume of business steered toward a particular provider.

At the scandal's heart are allegations of "pay-to-play" deals—brokers acting in concert with providers to rig bids to steer clients to predetermined providers. In return, brokers were allegedly paid additional compensation in the form of contingency commissions. More specifically, the Attorney General alleges that Marsh, and by inference many other brokers, apparently pumped up the earned commissions through a variety of means, including: (1) as asking for less than competitive "courtesy" bids; (2) asking for "courtesy" presentations; (3) requesting "B" and "C" bids; and (4) soliciting "decline to bid" letters. The apparent purpose of these schemes was to create the appearance that the brokers solicited competitive bids with an understanding that the favor would be returned to the accommodating provider on other business.

The complaint alleges that such actions violate New York's antitrust and fraud laws, as well as the broker's duty to act in good faith in representing the interest of its clients. In response to these rapidly developing events, the California Insurance Commissioner, John Garamendi, announced the hiring of a private law firm to represent the California Department of Insurance against insurance brokers for accepting kickbacks.

Impact on the California Construction Industry

The Wall Street Journal's front page story declares that since last week's filings, major carriers and brokers have rushed to present evidence to the Attorney General to admit collusion in an apparent attempt to get "credit" for cooperation and to reduce their eventual punishment. As a result, the pace of the investigation has "rapidly accelerated."

None of the news articles surveyed expressly named contractor general liability policies or builders risks insurance. The Wall Street Journal article, however, does quote Mr. Spitzer as stating "he expects his probe to reach employee benefits . . . workers compensation . . . and (that) virtually every line of insurance has been implicated." Therefore, it is reasonable to assume that these practices may extend to various construction-industry insurance products, such as wrap-up policies and builders-risk policies. If so, the impact could be that California contractors and owners have paid millions of dollars of excess premiums. Of additional concern is that persons and entities who knowingly communicate a false statement to facilitate the presentation of a false premium cost for payment or reimbursement by a public agency may be liable under the California and federal false claims statutes, which could expose them to treble damages and attorneys' fees.

What To Do

Depending upon your relationship with your current and past insurance providers and your current and past insurance brokers, you may want to consider any or all of the following steps.

Write to the president or chief executive officer of each brokerage firm that has assisted your company in procuring insurance coverage during the last ten years. Identify in your letter the provider, policy number, and policy year for each policy for which you have a concern and ask for a written response to the following questions:

• Has your firm received a contingency or deferred compensation payment from any company for any policy provided for our benefit?
• If so, provide a summary of the amounts paid including, for each payment received, the name of the provider, the policy numbers and policy years for which each payment was received, and the amount of each payment. In addition, provide copies of each written disclosure made to our company that describes the existence, nature, and extent of each payment received.
• If you have any information or reason to believe that any policy procured either in whole or in part for our company's benefit, and for which your firm received a contingency or deferred compensation payment, were presented to us for consideration with false, misleading, incomplete, or inaccurate information regarding your firm's efforts to obtain competitive pricing for similar policies, provide the following information:

• A description of the relevant policies and policy years;

• A description of the incomplete, false, misleading, or inaccurate information; and

• Copies of all relevant documents.

• Contact trade organizations or industry groups to ask their assistance in obtaining the information requested from your broker. Also, inquire about what efforts California's insurance commissioner and attorney general are taking to investigate these issues with specific reference to the implication of such investigations to your industry.

Why Should You Expect Cooperation From Your Broker?

First, the California False Claims Act contains provisions that allow for reduced penalties if a party cooperates in uncovering and disclosing false claims. In addition, under certain circumstances, managing officers of a company may escape personal liability for illegal acts committed by their employees or by other officers if they voluntarily and promptly disclose information regarding such acts. Thus, the request for disclosure provides a powerful incentive for officers who may have learned of improper activity after the fact. Almost certainly, these principles are behind the rush to disclosure cited in the Wall Street Journal's article.

If you would like additional information or assistance in implementing these suggestions, please contact Roger Hughes or John Banister at Bell, Rosenberg & Hughes LLP.