MMC Settles 'Shameful' Bid-Rigging Case

January 31, 2005 ( - Marsh & McLennan Companies (MMC) - a key target in the ongoing federal/state insurance bid-rigging probe - has agreed to set up an $850 million fund to compensate clients hurt by business practices it admitted were "shameful."

MMC statement posted on its Web site said the fund will compensate US clients who hired its Marsh insurance brokerage subsidiary to place insurance with inception dates between January 1, 2001 and December 31, 2004 in cases where the clients incurred contingent commissions or overrides recorded by Marsh between January 1, 2001 and December 31, 2004.

According to the Marsh statement, these clients will be eligible for payment based on the premium and the amount of estimated Market Service Agreement revenue recorded by Marsh between January 1, 2001 and December 31, 2004. The clients won’t have to prove fault, harm, or wrongdoing.

In a  separate statement posted on the Web site of New York State Attorney General Eliot Spitzer, Marsh officials were contrite about the contingent commission practices that landed them in legal hot water. Marsh said it wanted to “apologize for the conduct that led to the actions filed by (Spitzer) and Superintendent of Insurance. The recent admissions by former employees of Marsh and other companies have made clear that certain Marsh employees unlawfully deceived their customers. Such conduct was shameful, at odds with Marsh’s stated policies and contrary to the values of Marsh’s tends of thousands of other employees.” The statement is significant because early reports from the settlement talks indicated that MMC was resisting pressure for the apology (See  Report: Spitzer wants $$$ and Apology from Marsh & McLennan )

According to MMC, it will place assets in the settlement fund in four annual installments. On June 1, 2005 and 2006, respectively, MMC will pay $255 million, while it will pay $170 million on June 1, 2007 and 2008, respectively. In addition to the $232 million reserve established in the third quarter of 2004, MMC said it will take a pre-tax charge to fourth quarter 2004 earnings of $618 million to reflect the impact of the settlement.

In his Web statement, Spitzer applauded MMC’s agreement on the settlement, its public apology, and its promises for corporate reforms. “To its credit, Marsh is not disputing the problems identified in our original complaint,” Spitzer said. “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.”

For his part, MMC president and chief executive officer Michael Cherkasky said the long-rumored pact with Empire State authorities allows the firm to move forward: “(The pact) removes a major uncertainty for the company and enables us to focus all of our attention on serving our clients. We are also pleased to have moved quickly and decisively to resolve these matters in a manner that compensates the valued clients for whom Marsh placed insurance in the United States.”

Corporate Changes

As part of its corporate governance reforms, MMC will establish a Compliance Committee of the MMC Board of Directors and has appointed a chief compliance officer, the company said.

Monday’s agreement comes after Spitzer filed a complaint and the Insurance Department filed citations in October alleging that Marsh steered its clients to insurers with which it had lucrative payoff agreements, and that the firm solicited rigged bids for insurance contracts (See  Spitzer Takes On Contingent Commissions ). In the last three months, six insurance executives from three companies have plead guilty to criminal charges related to the scheme (See  Marsh SVP Pleads Guilty in Spitzer Bid-Rigging Probe ).

Acording to Spitzer’s original complaint, Marsh collected approximately $800 million in contingent commissions in 2003. The complaint alleged that those commissions were tainted by conflicts that harmed Marsh’s customers — large corporations, small and mid-size businesses, municipal governments, school districts and some individuals.

The text of the MMC statement and the agreement with Spitzer is attached to Spitzer’s Web statement. The results of MMC’s internal probe, conducted by law firm Davis Polk & Wardwell, is included with the company’s public statement on the settlement.