Attorney General Eliot Spitzer on Thursday filed a lawsuit against the world’s largest insurance broker, Marsh & McLennan Cos., alleging that it steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that Marsh solicited rigged bids for insurance contracts.

“The insurance industry needs to take a long, hard look at itself,” Spitzer said. “If the practices identified in our suit are as widespread as they appear to be, then the industry’s fundamental business model needs major corrective action and reform.”

Major insurance companies — ACE, AIG, The Hartford and Munich American Risk Partners — are named in the complaint as participants in steering and bid rigging. Other insurance companies are still under investigation.

Simultaneously, Spitzer announced that two insurance company executives have pleaded guilty to criminal charges in connection with the scheme.

The actions against the brokerage firm, Marsh & McLennan Companies, and the two executives stem from a widening investigation of fraud and anti-competitive practices in the insurance industry. Evidence revealed in today’s lawsuit also implicates other major insurance carriers, Spitzer said in a press release.

Spitzer added, “There is simply no responsible argument for a system that rigs bids, stifles competition and cheats customers.”

The lawsuit, filed in State Supreme Court in Manhattan, alleges that for years Marsh received special payments from insurance companies that were above and beyond normal sales commissions. These payments — known as “contingent commissions” — were characterized as compensation for “market services” but were, in fact, rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies.

Industry representatives defend this long-standing practice as acceptable and even beneficial to clients, but the Attorney General’s office has uncovered extensive evidence showing that it distorts and corrupts the insurance marketplace and cheats insurance customers.

“Contingent commissions are just one of the many practices insurance companies undertake to create a ‘hard” market that makes it difficult for corporations to purchase and retain insurance coverage as part of a comprehensive risk management strategy,” said David Wood, partner at Wood & Bender.

“We have seen evidence of contingent commission practices for some time and applaud Attorney General Spitzer’s actions,” added Bender. “Along with other practices, such as Retrenchment, Restriction and Rescission, known as the 3-Rs in the insurance industry, carriers have a longstanding history of business practices that put corporations at a disadvantage.”

In addition to steering business to its insurance company partners, Marsh, at times, solicited fake bids, which deceived its customers into thinking that true competition had taken place. Marsh did this even as it claimed in public statements that its “guiding principle” was to always consider its client’s best interests.

Spitzer’s complaint against the company cites internal communications in which executives openly discuss actions that were aimed at maximizing Marsh’s revenue and insurance companies’ revenues — without regard to clients’ interests.

The two executives pleaded guilty to participating in the illegal conduct and are expected to testify in future cases.

According to the complaint, Marsh collected approximately $800 million in contingent commissions in 2003. Spitzer’s civil complaint seeks an end to the steering and bid rigging, disgorgement of improper payments, restitution and punitive damages.

The immediate victims of the illegal practices were Marsh’s customers — mainly large corporations seeking property and casualty coverage, but also small and mid-size businesses, municipal governments, school districts and some individuals.

(via Office of New York State Attorney General)