Thousands of companies and governments nationwide that bought insurance through a broker expecting the lowest rates will share in the proceeds from a $153 million settlement of a bid-rigging scheme involving Zurich American Insurance Co.
The victims, which include small, mom-and-pop retailers, school districts, governments and large corporations, will receive $88 million, said New York Attorney General Eliot Spitzer, who led the investigation and announced the settlement Monday.
Zurich American, a subsidiary of Switzerland’s Zurich Financial Services, also agreed to pay penalties and costs of the investigation to the three states in the settlement: $39 million to New York, and $13 million each to Connecticut and Illinois.
Zurich, which admitted no wrongdoing in agreeing to the settlement, will also adopt reforms. Among them will be an end to “contingent commissions” in excess casualty insurance, the line of business that Spitzer said involved bid-rigging. Zurich will also stop paying contingent commissions on other products if 65 percent of the industry drops the fees that Spitzer said can cause conflicts of interest that hurt consumers.
Zurich will also disclose more about its transactions.
“With our significantly enhanced compliance structure, and our companywide commitment to ethical behavior and outstanding service, we have in place standards that promote the best interests of our customers, agents, brokers and Zurich,” said Zurich Financial CEO James Schiro.
The settlement is part of Spitzer’s investigation of Marsh & McLennan Companies Inc., the nation’s largest property and casualty brokerage. Marsh settled with Spitzer last year for $850 million over allegations of bid rigging and price fixing as well as hidden commissions.
Zurich was one of the companies Spitzer and state Insurance Superintendent Howard Mills accused of participating in an insurance bid-rigging scheme that used phony bids to fool customers into choosing a pre-determined company within the scheme. The scheme eventually provided all participants with steered contracts and prices not determined by a free market.
“Zurich’s willingness to acknowledge problems, adopt reforms and provide appropriate compensation to customers will help the company move forward to help promote full and fair competition in the insurance industry,” Spitzer said.
Spitzer said Zurich was among a few companies that would submit bogus high bids to help steer some contract to one company and could expect to have the same done for them.
In announcing the settlement, Spitzer cited an e-mail from a Marsh broker to a Zurich underwriter seeking a phony bid for an insurance contract that Spitzer said was being steered to American International Group Inc. The e-mail included: “Can you give me a protective indication on this. It is an AIG renewal and AIG already quoted it so just give me a bad price with higher per occ. attachment and then we can be done with this.”
Spitzer said Zurich provided the phony quote in the deception of a Marsh customer.
“Our investigation revealed that Zurich schemed with insurance brokers and other insurers to rig bids, behavior that led policyholders to pay more for insurance,” said Illinois Attorney General Lisa Madigan. “Zurich also secretly paid contingent commissions to brokers in exchange for the brokers steering business to Zurich.”
Earlier this month, Zurich agreed to pay nearly $172 million in a separate deal with nine states to settle allegations of bid-rigging and price-fixing in the commercial insurance market. Policyholders in 50 states will receive $151.7 million in refunds in the settlement with California, Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania, Texas and West Virginia. Those nine states will get an additional $20 million for investigative and attorney costs.
“The agreements concluded within the last two weeks represent significant progress in Zurich’s efforts to resolve the uncertainty associated with certain industrywide practices,” said Zurich CEO Schiro. “This industry, like others before it, is undergoing a transformation, and these agreements will bring greater clarity to how Zurich will move forward to serve producers and customers in this new era of transparency.”