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Connecticut Attorney General Announces Insurer ACE to Pay $80 Million to Settle Bid Rigging Allegations - Press Release

Attorney General Announces Insurer ACE to Pay $80 Million to Settle Bid Rigging Allegations

 

April 26, 2006

 

Attorney General Richard Blumenthal today announced that insurer ACE, Limited (ACE) will pay $80 million in an agreement with Connecticut, Illinois and New York to settle allegations it rigged bids and secretly paid insurance brokers tens of millions of dollars in exchange for steering business to ACE.

 

The agreement - the second major settlement in an expected series designed to eradicate bid rigging and secret payments in the insurance industry - includes an $8 million penalty paid to Connecticut.
ACE has agreed to adopt sweeping business reforms and pay millions to policyholders and taxpayers for the kickback and bid rigging scheme that spanned years.

 

Since at least the mid-1990s, ACE and other insurers have paid hundreds of millions of dollars in so-called "contingent commissions" to the world's largest insurance brokers, including Marsh & McLennan Companies, Inc., Aon Corporation, Willis Group Holding Ltd., and Arthur J. Gallagher & Co., as well as tens of thousands of smaller brokers and independent agents.

 

In exchange for these contingent commissions, brokers agreed to steer polices for excess casualty insurance to ACE, and maintain existing ACE policies with increased premiums. Blumenthal said the bid rigging had the effect of raising premium prices for insurance consumers and steering business to ACE, stifling competition. ACE does not deny these allegations.

 

"This settlement ends another high-stakes game of pay-to-play," Blumenthal said. "This recovery from ACE will go straight to consumers' pockets - payback for a scheme that shortchanged consumers and stifled competition. ACE is compensating consumers for more than a decade of deliberate secret payments to brokers in exchange for business, and bid rigging. It paid big bucks to brokers - loading the cost of these payments into premiums. Consumers have been footing the bill for this greed, and now they will get money back.

 

"We are continuing to pursue those companies who deceived and bilked their customers by paying or receiving these illegal secret payments. Under this agreement, like the one we recently entered into with Zurich, ACE is required to cooperate in our continuing investigations. We will leverage this cooperation and use evidence from Marsh's co-conspirators in our legal action against Marsh."
Department of Consumer Protection Commissioner Edwin R. Rodriguez, who supported the settlement, said, "The penalties levied against ACE and the recent one against Zurich will hopefully send a clear message to the insurance industry that broker and agent kickback practices will not go unnoticed. These non-competitive practices cost consumers higher premiums and are not healthy for the overall Connecticut economy."

 

In a 2002 agreement concerning environmental insurance, for example, ACE agreed to pay Marsh an aggregate percentage of gross written premium that varied from 4 percent for total placements of $1 million to $7 million, up to 6 percent for total placements above $10 million. The cost of these secret payments to Marsh were passed on to ACE's customers in the form of higher premiums.
In order to ensure that ACE won business, Marsh instructed other insurance companies to provide intentionally losing bids that were inferior to those provided by ACE. These losing quotes were dubbed "fake," "backup," "supportive" or "protective quotes," as well as "B Quotes" or simply "B's."

 

ACE also agreed to provide fake bids with the understanding that it would be the beneficiary on other occasions. This bid rigging gave clients the impression that other insurers' bids were the best available when, in fact, that was not the case.

 

Under the settlement, ACE will pay $40 million into a fund by June 2006 to pay back policy holders who purchased or renewed ACE's excess casualty insurance through Marsh from Jan. 1, 2002 through Sept. 30, 2004.

 

Payments to participating policyholders will begin in March 2007.

 

In addition to the payments to policyholders, ACE agreed to a ban on paying contingent compensation and will pay $40 million as a penalty to the states involved in the agreement. Of that amount, $8 million will go to Connecticut.

 

Under the settlement, ACE is required to cooperate in the ongoing insurance investigation.

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