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Insurance Broker Will Pay Back Customers

Marsh to Create $850 Million Fund To Settle Charges

By Kathleen Day and Brooke A. Masters
Washington Post Staff Writers
Tuesday, February 1, 2005; Page E01

The nation's largest insurance broker, Marsh & McLennan Cos., agreed yesterday to repay customers $850 million and revamp its business practices to settle charges by New York Attorney General Eliot L. Spitzer and the state's insurance regulator that the company had accepted kickbacks and conspired with insurers to rig bids over the past four years.

In addition, the company apologized for "unlawful" actions by a few of its 60,000 workers and "shameful" behavior by dozens of others, while accepting responsibility for a corporate structure that enabled the wrongdoing to occur. But it stopped short of admitting corporate wrongdoing, which would have provided class-action lawsuits with a weapon to use against the insurance giant, which acts as a broker for large companies and organizations.

New York Attorney General Eliot L. Spitzer said his office is still investigating insurance industry conflicts of interest. (J. Scott Applewhite -- AP)

States Flex Prosecutorial Muscle (The Washington Post, Jan 12, 2005)
Marsh Broker Pleads Guilty in Fraud (The Washington Post, Jan 7, 2005)
Marsh Plays An Inside Hand (The Washington Post, Dec 17, 2004)
Marsh to Make Payments More Transparent (The Washington Post, Oct 27, 2004)
Marsh Replaces CEO In Wake of Charges (The Washington Post, Oct 26, 2004)
Ex-Prosecutor Becomes Chief at Firm in Crisis (The Washington Post, Oct 26, 2004)
Marsh Talks to Spitzer About Settling (The Washington Post, Oct 23, 2004)
Spitzer Targets Insurance Brokers (The Washington Post, Oct 15, 2004)
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"We've never been a company that condones price-fixing," Marsh & McLennan president and chief executive Michael G. Cherkasky said in an interview. But, he said, the company's practice of accepting contingent pay from insurance companies -- and not disclosing the practice to customers -- created a "conflict of interest" and a "systematic problem" that gave its brokers incentives at odds with the interests of Marsh & McLennan's customers.

The company hopes the settlement, which calls for the company to repay clients across the country from a pool of $850 million over four years, will lessen the chances other states and other customers will file charges, Cherkasky said. Any customer that accepts a repayment must agree not to sue, he said. The company anticipates most state officials will be satisfied with the settlement when they see that companies in their jurisdiction can be repaid for overcharges.

Spitzer said he and his staff "are very happy" with the settlement, which is the largest his office has ever negotiated with a single company. "To its credit, Marsh is not disputing the problems identified in our original complaint," Spitzer said in a statement. "Instead, the company has embraced restitution and reform as a way of making a clean break from the practices that misled and harmed its clients in the past."

The settlement stems from an ongoing, nationwide probe of the insurance industry by New York and other states that Spitzer sparked in the fall when he accused Marsh & McLennan of wrongdoing. The probe has broadened to include the health, life and auto insurance industries.

In an interview yesterday, Spitzer said his office continues to investigate whether conflicts of interest may be driving up prices for medical and legal malpractice insurance, home and car insurance, and group life and health insurance. He said he also plans to bring additional criminal cases against individuals involved with steering and bid-rigging.

"Last night when we finished up about 10:30 p.m., I said, 'So everyone is going to be back here at 8 a.m., right?' " Spitzer said. "We have got a ton more work to do."

Cherkasky said the elimination of contingency fees and other practices would affect insurance costs but said it would be months before anyone knew by how much.

The repayment fund will compensate Marsh clients who paid above-market prices for corporate liability insurance over the past four years. Payments will be allocated based on how much business Marsh had in each state. Companies in California, for example, are eligible for $131 million, the biggest chunk of the pool. Those in New York will be eligible for the next-largest amount, $94 million; those in Pennsylvania $58 million; those in Texas $55 million; and on down the line, Cherkasky said.

In addition to eliminating contingency fees -- which the company did several months ago -- Marsh has promised to make its fee arrangements with the insurance industry more transparent to clients. The company already has a relatively new top executive: Cherkasky, who was once Spitzer's boss in the New York district attorney's office and who had headed a Marsh & McLennan subsidiary, was promoted to chief executive in the fall after the company's board of directors ousted Jeffrey W. Greenberg in response to Spitzer's probe.

Albert M. Yu, research analyst for the money management firm of Clover Capital Management Inc., which owns stock in Marsh, said he did not think eliminating contingency fees will cut the cost of insurance significantly. "Commissions are a very small portion of the insurance tab," he said.

Marsh shares rose $1.41 yesterday, closing at $32.50 in trading on the New York Stock Exchange.

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