Briefing: Marsh Fund to Pay $850M In Settlement With Spitzer

• Raymond J Lehmann
• March 2005
• 

Parting the most ominous storm cloud that had been looming over the insurance industry in recent months, Marsh & McLennan Cos. is to establish an $850 million restitution fund to settle civil fraud and antitrust charges brought against the company and its Marsh Inc. brokerage unit by New York state Attorney General Eliot Spitzer, the company confirmed.

Concluding negotiations kicked off after the Oct. 25 resignation of Jeffrey W. Greenberg as chairman and chief executive officer, the agreement brings to a close both Spitzer's suit against the company -- which alleged the world's largest insurance broker constructed elaborate schemes to rig bids, defraud clients and indulge in "kickbacks" that came in the form of market service and contingent-commission agreements -- and a related market-conduct examination from the state Insurance Department.

However, it remains possible that criminal charges against Marsh executives or officers still could be forthcoming, department spokesman Mike Barry said.

Since Spitzer's suit was filed on Oct. 14, 2004, six executives from four companies -- Ace Ltd., American International Group Inc., Zurich American and Marsh itself -- have pleaded guilty to criminal charges related to Spitzer's investigation.

"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."

Under terms of the agreement, Marsh clients with policies initiated between Jan. 1, 2001, and Dec. 31, 2004, will be eligible to recover from the fund without needing to prove fault, harm, or wrongdoing. Settlements will be apportioned on a pro rata basis, commensurate with the amount of premium placed by Marsh and the amount of market service agreement revenue the company earned on those placements. According to Michael G. Cherkasky, Marsh & McLennan's president and chief executive officer, the compensation fund will be available to clients in all 50 states, with California clients allocated the largest amount.

In addition, Marsh pledged to implement written standards of conduct for placement of insurance companywide; offer its clients complete disclosure of all manner of compensation the company earns; provide all quotes and terms it receives from insurance companies to its clients; and establish a compliance committee within its board and a chief compliance officer, who will provide regular reports to New York's insurance superintendent tracking the status of compliance efforts.

"This agreement starts the process of ending a period of uncertainty," Cherkasky said during a conference call. "It allows us to proceed forward, temporarily scarred, but fundamentally well-positioned to be the industry leader in serving the needs of our clients, and delivering performance, value and integrity. We look forward to tomorrow."

The company will pay the $850 million over four years, with installments of $255 million in June 2005 and June 2006, and $170 million in June 2007 and June 2008. A pretax charge of $618 million will be taken against the company's fourth-quarter earnings to reflect the settlement. A previous reserve charge of $232 million was taken in the third quarter of 2004 in anticipation of a settlement with Spitzer. According to Spitzer's original complaint, Marsh collected about $800 million in contingent commissions in 2003. The company since has pledged to cease accepting the commissions.

Equity analyst Vinay Saqi of Morgan Stanley, who estimates the company's total exposure to other states and private suits to be about $2 billion, said the fact that the fund payments aren't classified as either a fine or a penalty is significant for the company, as it makes them tax deductible.

According to David K. Bradford, executive vice president for insurance research and consulting firm Advisen Ltd., it remains unclear whether the settlement will cut short the spate of private policyholder suits that have been filed against the company. While the settlement doesn't include an admission of wrongdoing from the company, Marsh offered a statement of apology through the attorney general's office.

Broker Scrutiny Time Line

-- April 26, 1998: Placement service agreements between brokers and major writers of excess commercial insurance become a hot topic at Risk and Insurance Management Society meetings in San Diego.

-- March 19, 2003: National Consumers League writes to attorneys general and insurance commissioners in California, New York, Florida and Connecticut to urge investigation of tying and leveraging practices by brokers.

-- Feb. 10, 2004: Washington Legal Foundation writes to the attorneys general and insurance departments of New York and California in support of NCL initiative.

-- April 23, 2004: Marsh & McLennan Cos., Aon Corp. and Willis Group Holdings Ltd. all confirm they have been subpoenaed by New York state Attorney General Eliot Spitzer.

-- Oct. 14, 2004: Spitzer files civil suit against MMC, charging fraud and antitrust violations.

-- Oct. 15, 2004: Kroll Chief Michael G. Cherkasky is named to succeed Marsh Inc. CEO Ray J. Groves, as MMC announces it has suspended its PSAs.

-- Oct. 26, 2004: Jeffrey W. Greenberg resigns as head of MMC, succeeded by Cherkasky.

-- Nov. 4, 2004: Marsh confirms it has terminated four employees in connection with an internal investigation of bid-rigging.

-- Nov. 9, 2004: Marsh cuts 3,000 jobs as earnings plummet.

-- Jan. 31, 2005: MMC reaches $850 million settlement with Spitzer.

By R.J. Lehmann, associate editor: raymond.lehmann@ambest.com