Attorney General Lockyer Announces $171.7 Million Settlement with Zurich Insurance to Resolve Bid Rigging, Pay-to-Play Allegations
Settlement Will Provide Business Clients $151.7 Million in Restitution
(SACRAMENTO) – Attorney General Bill Lockyer today announced Zurich American Insurance Company (Zurich) will pay $151.7 million in restitution and reform its business practices to settle allegations that it unlawfully rigged bids for commercial insurance and made undisclosed payments to brokers for steering clients to Zurich.
“Zurich participated in schemes with brokers and other insurers that inflicted financial harm on businesses and damaged the marketplace,” said Lockyer. “This settlement holds Zurich accountable for its misconduct, compensates clients it harmed, and provides reforms and ongoing enforcement by Attorneys General to help ensure the company does not commit similar abuses in the future.”
The settlement resolves antitrust and unfair business practices investigations by Lockyer and Attorneys General in nine other states. Lockyer within weeks formally will file California’s settlement in state court.
The alleged bid rigging scheme worked like this: Insurers submitted phony, inflated bids, knowing there was no real competition and that the winner had been predetermined. The designated winner also would submit an inflated bid, but lower than its “competitors.” Brokers then told clients that the winning bid was the best deal available. Brokers guaranteed the “losers” they would win other bids pursuant to the same, rigged process, and allegedly threatened to punish insurers who balked at participating.
The clandestine bid rigging defrauded business clients and caused them to pay artificially high prices for commercial insurance, officials said. The investigation by Lockyer and other Attorneys General found that Zurich played a central role in the bid rigging scheme, along with major brokers and other insurers.
The second targeted practice involved undisclosed “contingent” payments made by insurers to brokers. In addition to standard commissions, which were disclosed to insured businesses, major national insurers allegedly made secret payments to brokers based on how much clients the broker steered to them and kept for them.
The contingent payments posed a potential conflict of interest for brokers by creating an incentive to sell insurance that earned them extra fees, instead of coverage that best fit the needs and pocketbooks of their clients. The contingent payments should have been fully disclosed to business clients, said Lockyer, so they had all material information they needed to make informed decisions.
The restitution will be provided to Zurich customers eligible to receive compensation in a private class action lawsuit now pending in New Jersey federal court. The money will be allocated among the settling states under a schedule to be developed by the private class action counsel, in consultation and cooperation with the Attorneys General. That allocation plan, which must be approved by the New Jersey federal court, and other factors will determine how much of the $151.7 million ultimately goes to eligible California businesses, said Lockyer.
Aside from the restitution, the settlement requires Zurich to pay the states a total of $20 million to cover their costs and fees.
To guard against future unlawful practices, the settlement requires Zurich to adopt specific reforms of the way it conducts its business. Zurich will be prohibited from submitting artificially inflated bids or colluding with others to rig bids. And prior to a commercial insurance policy taking effect, Zurich must disclose to prospective clients whether the compensation it pays a broker includes contingent compensation.
Zurich also will be required to implement a compliance program that includes employee training and other measures to prevent, report and punish improper conduct. If an Attorney General believes Zurich has violated the settlement’s terms, the Attorney General must notify Zurich and give the company a chance to cure the alleged violation. If Zurich fails to remedy the problem within 60 days from the notification date, the Attorney General can go to court to compel compliance.
In addition to California, the other settling states include: Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania, Texas, Virginia and West Virginia.
Lockyer in October 2004 launched an investigation into bid rigging and contingent payments in the commercial insurance industry. The broader investigation remains ongoing.