Spitzer Expands Focus in Insurance Probe

November 15, 2004 (PLANSPONSOR.com) - Allegations regarding insurance industry practices reached a new level on Friday, as New York's attorney general charged that fraudulent practices led to higher premiums for workers.

Attorney General Eliot Spitzer on Friday sued Universal Life Resources, accusing the California-based firm of steering business to insurers like MetLife, Prudential, and Unum Provident in exchange for millions of dollars in payments, which, until 2003, were not properly disclosed.   In turn, insurance coverage was bought for employees of companies like Viacom and Intel.   Additionally, the  complaint  contends that Universal Life inflated certain fees relating to benefit enrollment materials, ultimately passing that cost onto the clients’ employees.

“What is particularly egregious in this case is that the costs of ULR’s concealed payments were ultimately borne by individual employees, who were in no position to know about or contest these illegal practices,” Spitzer said in a press release.

Starting Points

Spitzer launched his latest salvo less than a month after first wading into the area of commission practices in the insurance industry with a lawsuit targeting Marsh & McLennan, the biggest insurance broker, on October 14 (see  Spitzer Takes On Contingent Commissions ).   At the time, Spitzer accused Marsh & McLennan of steering clients to insurers for lucrative payoffs under long-standing agreements. The firm collected $800 million in so-called contingent commissions in 2003 alone, investigators said, and Spitzer also accuses the company of soliciting rigged bids for insurance contracts – practices that went back to at least the 1990s, he said.   The victims of those practices were mostly large corporations who were deceived into buying property and casualty coverage that may have cost more, but also included small and mid-size businesses, municipal governments, school districts, and individuals, according to the complaint.

In announcing the suit, Spitzer noted that “Today’s case demonstrates that the corrupt practices first laid bare in the Marsh suit are present in additional sectors of the industry.   Secret payoffs and conflicts of interest that infected the market for property and casualty insurance have taken root in the employee benefits market as well.”

Consumer Focus

Like Marsh, San Diego-based Universal Life is another influential middleman, but in the area of employee benefits, such as the life, disability, and accident insurance a company obtains for its workers – and in Friday’s action, Spitzer drew a clear bead on practices that impacted the “ordinary consumer.”   “This case brings the insurance industry fraud that we have uncovered to the ordinary consumer, where monthly premiums have been inflated by the gamesmanship and illegal conduct of ULR and the carriers,” Spitzer said.   “This conspiracy to defeat competition and push business not to the lowest-cost provider but to the company willing to make a payoff is destroying competition.”

A lawyer for Universal Life, Bob Cleary of the firm of Proskauer Rose, declined to comment other than to say that the attorney general’s office had not sent him a copy of the complaint.

Universal Life is a closely-held firm with about 80 employees. Since 1999, the firm has acted as an insurance broker to more than four million employees of big American corporations, according to Spitzer’s office.   Major clients include: Colgate-Palmolive Co.; Eastman Kodak Co.; Marriott International, Inc.; United Parcel Service; Inc.; Dell, Inc; and Intel – where, a week after Spitzer’s first suit was launched, an employee of the firm filed a law suit charging that workers who buy life insurance and other similar coverage through their employers are unknowingly also paying hidden fees (see  Intel Worker Suit Charges Insurance Fees Inflate Health Costs ).

Hidden Agreements

The complaint further alleges that ULR hides these agreements from its clients by:

  • falsely representing its compensation,
  • omitting its fees from mandatory government filings,
  • refusing to deal with insurers who will not go along with its concealed arrangements.

The complaint offers a number of examples of ULR’s improper practices. In one instance, ULR obtained an Prudential’s agreement to artificially list service prices at three times their normal rate, so ULR could falsely tell a client, Viacom, Inc., that its insurance costs would be no cheaper if the insurer provided in-house the same services that ULR was providing. In another case, ULR solicited a fictitious bid in order to block a disfavored insurer from reaching the final round of a bidding process for group life coverage at Marriott International, Inc., according to the complaint.

The suit, filed in New York State Supreme Court in Manhattan, also names the firm’s founder and chief executive, Douglas P. Cox, saying that he “completely controls ULR”  

The lawsuit cites other insurers, including MetLife and Unum Provident, but does not name them as defendants. The insurers, Spitzer said, “were participants and they should have objected and refused to go along.”   “The mastermind of this scheme is ULR, but the carriers were complicit and did not come forward rapidly enough,” he said.

In one example cited in the lawsuit, Universal Life and the Minnesota Life Insurance Company reached an agreement on a so-called override payment – defined in the lawsuit as additional payments to encourage brokers to direct business to insurers. Minnesota Life insisted that the payments be disclosed to the client.   Universal Life, the lawsuit contends, refused to do the deal and stopped doing business with the life insurance company.

The complaint alleges that ULR received “override” payments from insurers for awarding them contracts to provide group coverage, collecting about $11.5 million of its $25 million in revenues last year through such payments, Spitzer’s lawyers estimated.   The company appeared to generate another $5.6 million last year through the collection of “communication fees” from insurers that were passed on directly to insurance consumers without their knowledge, the complaint said. The fees typically totaled $10 on each supplemental life insurance policy and $5 on supplemental disability policies, according to Spitzer.

The suit seeks to end the special agreements, return any improper payments, and provide restitution for injured parties, as well as seeking punitive damages.