States sue Liberty Mutual in bid-rigging probe

ALBANY, N.Y. — New York and Connecticut attorneys general sued Liberty Mutual in separate actions today as part of a nationwide investigation into bid-rigging in the insurance industry.

New York Attorney General Eliot Spitzer and Connecticut Attorney General Richard Blumenthal accused the major property and casualty insurer of making payoffs to insurance brokers and independent agents to steer customers to Liberty Mutual, which is based in Boston. Spitzer said the incentives and payoffs worked, and brokers and agents violated their duty to help customers get the lowest-priced and most-suitable insurance coverage.

The practice worked both ways for Liberty Mutual, according to the lawsuit, which quotes e-mails between insurance companies in which Liberty is asked to provide higher "fake'' or "protective'' bids after being told the bid of a competitor that was intended to win the contract. The lawsuit claims one of these transactions allowed American International Group Inc. to increase its premium by 20 percent with the same client.

"I finally had (American International Group) agree to write this thing at $140,000. Have Liberty come in around $175,000,'' according to an internal e-mail from insurance broker Marsh & McLennan Cos. Inc. quoted in the lawsuit.

"There is simply no justification for a major financial institution to rig bids and induce brokers and agents to abuse their position of trust with the insurance-buying public,'' Spitzer said.

A Liberty Mutual spokesman said the company will fight the accusations in court.

The company tried to resolve the accusations over the past two years, but the settlement demands from the attorneys generals were "excessive and unreasonable both in terms of magnitude and in their demands that we change legitimate business practices in states outside their legal jurisdictions,'' according to a company statement. The company said its conduct was "appropriate and lawful.''

"Unfortunately, two former lower level employees seriously violated our trust and our standards of conduct in their quotation activity,'' the company said. Both employees have resigned.

The civil lawsuit filed in state Supreme Court in Manhattan doesn't specify how much is sought to compensate for what Spitzer spokesman Marc Violette said were "illegal profits.''

It seeks restitution for clients, punitive damages, and payments equal to three times the amount policyholders were overcharged. Attorneys general from Connecticut and Illinois were part of the investigation. The accusations stem from a massive regulatory settlement in the industry. In January 2005, Marsh & McLennan Cos. Inc. paid $850 million to settle Spitzer's case into claims of bid rigging, price fixing and the use of hidden incentive fees. Spitzer had accused insurance companies and brokers of conspiring to create an intentionally losing bid on a business-insurance contract offer to create the appearance of a competitive bidding process.

The lawsuit claims the practice was ongoing since at least the early 1990s.

"This scheme has corrupted the nationwide marketplace for insurance, raised insurance premiums and caused many thousands of insureds to receive inferior insurance coverage,'' according to the lawsuit.

Blumenthal said the scheme had a ripple effect throughout the industry, raising insurance premiums as the market was affected by the artificially inflated prices.

"Consumers and our entire state economy suffered from Liberty Mutual's scheme to skew the insurance market through bid rigging and surreptitious kickbacks,'' Blumenthal said in a written statement.

"This lawsuit is another significant step in our continuing investigation and battle against corrupt, anti-consumer practices in the insurance industry — and there will be more soon,'' he said.

A former Liberty Mutual executive had said Marsh brokers told him to "submit (protective) quotes on certain pieces of business where Marsh had predetermined which insurance carrier would win the bid.'' That former executive, Kevin Bott, pleaded guilty to criminal charges in August 2005 as part of the investigation, Violette said Friday.

Seventeen executives in five companies — including eight former Marsh employees — pleaded guilty to criminal charges in the insurance investigation.