Budget & Finance

N.Y. Insurance Suit Catches Attention Of School Districts

By Andrew Trotter — November 02, 2004 5 min read

A legal assault on the world’s largest insurance broker by the New York state attorney general has stirred concerns that school districts may be among the victims of alleged fraudulent practices by the company.

In a 31-page complaint filed Oct. 14 in a state court in Manhattan, Attorney General Eliot L. Spitzer accused the New York City-based Marsh & McLennan Cos. Inc. and its Marsh Inc. unit of receiving improper “backdoor” commissions from insurance companies, of rigging bids to present to insurance customers that had hired Marsh as their broker, and of fabricating a spurious bid.

Some of the allegations, to which Marsh has not replied formally, involve a $910 million public school construction program in Greenville County, S.C. As the program’s insurance broker, Marsh failed in its duty to bring in insurance companies’ best offers to a fair bidding process, the complaint alleges. It states that “complicit and profiting insurance companies” may be involved in wrongdoing as well.

Several school officials and managers of statewide school risk-sharing pools said the reputation and reach of Marsh in the school market made its alleged behavior impossible to ignore.

New York state attorney general Eliot Spitzer.

“If there is truth to the allegations of what they were charged with, it is beyond the pale,” said Dubravka Romano, the associate executive director of risk-management services for the Texas Association of School Boards. “They have historically been a very fine, upstanding organization.”

Ms. Romano said the insurance pool for 1,125 Texas districts that she directs does not use Marsh as a consultant or as a broker for reinsuring the pool against catastrophic losses. But she said other statewide pools and individual school districts do use Marsh.

Contingent Commissions

Experts say Mr. Spitzer’s action appears to be the start of an industrywide probe similar to investigations the New York attorney general has conducted of other financial industries.

Marsh reacted to the complaint and a barrage of criticism from the financial press last week by taking several steps, starting with replacing its chairman and chief executive, Jeffrey W. Greenberg, and by renouncing so-called “contingent commission” agreements that it has with some insurance companies.

Such commissions, which allegedly earned Marsh $845 million last year, are paid when the broker places business with the insurer that turns out to be profitable. The arrangement is seen as harmful to the insurance customers whom the broker is supposed to represent.

Some other large insurance brokers also have agreements with some insurers to pay contingent commissions, but the practice is not universal.

By far, the more serious charge is bid rigging, experts said.

Mr. Spitzer alleges in the complaint that Marsh “obtained fictitious high quotes from insurance companies in order to deceive its clients into believing that true competition had taken place,” while using promises and threats to make insurance companies play ball.

“The losers in all of this, of course, are Marsh’s clients and the marketplace for insurance, which Marsh has corrupted by distorting and elevating the price of insurance for every policyholder,” the complaint charges.

Last week, Marsh pledged to give its clients full disclosure when negotiating with insurers on their behalf.

In response to Marsh’s reform plans, Mr. Spitzer announced he would seek civil but not criminal charges against the corporation, although he might still charge individuals with crimes.

Impact on Schools

Some education officials said the impact of Marsh’s practices on schools might include a higher cost of insurance and an undercutting of the competitiveness of the risk pools to which many school districts belong.

“We’ve had a lot of school districts in Ohio not come with our plan and go with Marsh for one reason or another—whether it be price or coverage,” said James Roman, the vice chairman of the Ohio School Plan, a consortium of over 350 school organizations in the state that offers members property, liability, fleet, and violence coverage. Marsh helps clients secure coverage for these and other purposes, such as workers compensation and medical insurance.

The allegations are disturbing, added Mr. Roman, who is the chief financial officer of the 3,000-student Talawanda school district, in Oxford, Ohio, and is scheduled to serve as the vice president of the Reston, Va.-based Association for School Business Officials International in 2005.

Officials involved in the nearly billion-dollar construction program in South Carolina’s 62,000-student Greenville County district, which is building 70 schools in four years, said they had no idea anything might be wrong with the services Marsh was providing. Nor is it clear whether the district has been harmed, though the Greenville County school board plans to investigate that question.

“In fact, we may have gotten a better deal” than without using Marsh, said Don Buck, the chief executive officer of Institutional Resources LLC, the Greenville-based company the district hired to manage the building program.

Institutional Resources hired Marsh in 2002 for $1.5 million to advise on insurance needs and to solicit bids from insurance carriers on a comprehensive package covering workers’-compensation claims, property damage, and a “wraparound” of other risks—a cheaper alternative than using a host of separate insurance policies.

Marsh brought in offers from three insurers, but the complaint charges that Marsh tried to steer the Greenville County contract toward Zurich Financial Services AG, the eventual winner, to entice it to sign a contingent-commission agreement—a fact it did not disclose to Institutional Resources.

And only one of the other two offers was genuine, according to the complaint. Marsh had sought a false, high bid from a third insurer, but, when it refused, Marsh fabricated a fictitious bid on that insurer’s behalf, the complaint alleges.

Mr. Buck said Institutional Resources followed Marsh’s recommendation in awarding the project to Zurich.

Philip Rohr, a representative of Building Equity Sooner for Tomorrow, a nonprofit corporation established by the Greenville County school board to sell construction bonds, said that in some capacities, the insurance broker has performed well.

“Marsh provides intensive training and safety coordination,” he said, noting that insurance losses are only $122,000 after more than a million man-hours of labor, the completion of 21 schools, and the start of construction on 31 other schools.

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