Yesterday, New York Attorney General Eliot Spitzer dropped a lawsuit on Marsh & McLennan's
Other companies named in the civil suit were Hartford Financial Services
To consider why this is bad, understand what it is that Marsh's clients pay it to do: companies and individuals who need insurance, rather than trying to figure such a complicated market out themselves, go to Marsh to serve as their advocate. Marsh figures out their insurance policy needs and then goes out into the market to negotiate with carriers on clients' behalf to maximize coverage at the lowest possible price. So if Marsh has side deals to steer deals to one insurance company or another -- even if they are disclosed to the customer -- the end result is that it has a built-in conflict of interest. And as the lawsuit spells out in lurid detail, this conflict seems to have become too much of a moral hazard for Marsh. A Marsh executive told the attorney general that these contingent commissions amounted to about $800 million in revenues for Marsh in 2003.
In his news conference yesterday, Spitzer absolutely savaged Marsh, saying that he was "misled at the very highest levels of that company" and that he very possibly might press for criminal charges against Marsh to go along with the civil suit. He also noted that evidence that his office has uncovered thus far suggests that illegal practices extend to every major insurance broker through every line of insurance. Marsh is the largest American insurance broker: Its biggest competitors, Aon
Contingent commissions are a long-standing practice in the industry and are not illegal. But Marsh claims that it considers its customers' interests above all when binding insurance, and such blatant conflicts have rightly been questioned for some time. Now it looks like the conflict was even worse than widely perceived. I'll provide more coverage on this in my regular commentary column on Monday.
Want more? See also:
- Bill Mann's AIG Lies Down With Dogs,
- or his Three Financials Behaving Badly,
- or how about Shannon Zimmerman's Surviving the Fund Scandal?
In his November issue, Inside Value's Philip Durrell has uncovered an insurance company that seems far, far away from the scandal enveloping the U.S. industry and offers a tasty opportunity for investors looking to buy quality companies on the cheap. Take a free trial to Inside Value and see what Philip has to say!