New York Attorney General Eliot Spitzer has followed the lead of a California lawyer and filed a suit accusing a San Diego insurance broker of misrepresenting its commission arrangements.[@@]

Spitzer alleges in a civil complaint filed in a state court in New York City that the broker, Universal Life Resources, has violated state laws by hiding commission override payments from employer clients.

Universal Life also has “conspired to unreasonably restrain trade and commerce” by selecting insurers on the basis of the hidden override commissions and soliciting fake bids to shut out insurers that did not make override payments, Spitzer alleges in the complaint in the case, The People of the State of New York vs. Universal Life.

In one case, Universal Life seems to have collected override commissions even though it agreed in a contract with a commercial customer to not collect override commissions, Spitzer says.

Spitzer also accuses Universal Life of leaving the override commissions out of its government filings, of refusing to do business with insurers that refused to pay hidden override commissions and of charging unreasonably high fees for communication services.

The Spitzer suit alleges that some of the companies that paid Universal Life to steer business their way included MetLife Inc., New York; Prudential Financial Inc., Newark, N.J.; and UnumProvident Corp., Chattanooga, Tenn.

In additional to Universal Life, the list of defendants includes 3 Universal Life affiliates and Douglas P. Cox, Universal Life’s president.

The suit seeks punitive damages and restitution for the injured parties.

The Spitzer suit follows on the heels of a suit, United Policyholders et al. vs. Universal Life Resources Inc., that was filed in October in a U.S. District Court in San Diego.

The federal suit was organized by John Stoia Jr., a partner at Lerach Coughlin Stoia Geller Rudman & Robbins L.L.P., San Diego. Stoia also filed a related suit in a state court in San Diego.

Unlike the Spitzer suit, the San Diego suits name several large life insurers as defendants.

Stoia concedes in the San Diego suits that the hidden payment arrangements cost each employee only a few dollars, but he argues that the total damage to employees is great because tens of thousands of employees are involved.

Cox and representatives for Universal Life and Cox were not available for comment at press time, but Cox responded to the Stoia allegations by “categorically denying any such allegations.”

“We look forward to continuing to serve our clients ethically and honestly as we have done in the past,” Cox said.

Some specific Spitzer allegations about Universal Life commission overrides and communication services charges:

- Commission overrides accounted for more than $11.5 million of Universal Life’s $25.3 million in 2003 revenue.

- Universal Life was one of at least 60 brokers that had commission override agreements with MetLife in 2003, but it accounted for more than 36% of MetLife’s $25 million 2003 override budget.

- A 2003 override agreement with UnumProvident required Universal Life to maintain 90% of the book of business it had the previous year with UnumProvident.

- Prudential normally absorbs the cost of communicating with employees or charges about $3.45 per employee for the service. Universal Life charged $10 per employee for the same service.

The New York State Insurance Department has directed Cox, Universal Life and 3 Universal Life affiliates to appear at the department offices Dec. 14 to respond to charges that they inflated employee benefit costs by using dishonest sales practices. The department has not directed the insurers named in the Spitzer complaint to appear.

Representatives for the 3 insurers listed in the Spitzer suit as participants in Universal Life commission override arrangements emphasize that their companies are working with Spitzer and other government officials.

“MetLife has been fully cooperating and will continue to fully cooperate,” MetLife spokesman John Calagna says.

“We have been cooperating with the attorney general’s office, and we will continue to cooperate with the attorney general’s office,” a Prudential spokesman says.

“We have read a copy of the lawsuit today, and we are reviewing it, and we intend to cooperate in every way,” says UnumProvident spokesman M.C. Gunther.

The Spitzer suit against Universal Life is part of a wave of regulatory scrutiny of broker compensation arrangements that has led to a barrage of subpoenas; the resignation of Jeffrey Greenberg from his former post as chief executive of Marsh & McLennan Companies Inc., New York; 3,000 layoffs at Marsh; and the firing of 2 employees at Hartford Financial Services Group Inc., Hartford, who declined to cooperate with investigators.

Life insurance industry executives have been reluctant to say much about the Spitzer probes and related investigations, but Alan Reynolds, a former banker who is now a senior fellow at the libertarian Cato Institute, Washington, has published an opinion article in The Wall Street Journal that has questioned the tone of the broker compensation controversy.

“The media dutifully described the New York AG’s unproven charges against a few as industry-wide ‘scandal,’” Reynolds writes in the article. “There’s no crime named ‘scandal,’ so presumptions of innocence can be dispensed with.”

Requiring better disclosure of commission overrides might be the best solution to disclosure problems, and efforts to eliminate commission overrides could backfire, by hurting efforts to improve the quality and persistency of business that brokers bring to insurers, Reynolds writes.