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Marsh To Pay $850 Million In Compensation (Updated)

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A large insurance broker has negotiated a settlement that should resolve an investigation initiated by New York Attorney General Eliot Spitzer.[@@]

The broker, Marsh & McLennan Companies Inc., New York, says it will be establishing an $850 million fund to compensate some U.S. policyholder clients affected by what Spitzer has identified as problems with brokerage practices.

Spitzer’s office filed a complaint against Marsh in October 2004, and New York insurance regulators filed citations against Marsh that month. The complaint and citations allege that Marsh steered clients to insurers with which it had hidden compensation agreements and that the firm solicited rigged bids for insurance contracts.

Together with the announcement of the settlement agreement, Marsh has released a report on an investigation it hired outside lawyers to conduct of its own operations. Although the lawyers who wrote the report say the investigation included the Marsh benefits and human resources consulting units, the lawyers focus mainly on evidence of bid-rigging and other problems at the company’s property-casualty brokerage units.

Marsh clients eligible to receive compensation include those who used Marsh to buy insurance coverage between Jan. 1, 2001, and Dec. 31, 2004, if those purchases involved Marsh collecting contingent commissions or overrides during that same 3-year period. “These clients will be eligible to receive a payment without having to prove fault, harm, or wrongdoing,” Marsh says in a statement about the settlement.

The settlement calls for Marsh to put cash in the compensation fund in 4 annual installments that will start this June and continue until June 2008.

Marsh emphasizes in its statement about the settlement that it is neither admitting or denying Spitzer’s allegations about its brokerage operations, and it says it has cooperated and will continue to cooperate with Spitzer’s “ongoing investigation of the insurance industry and individuals.”

“No portion of this fund represents a fine or penalty,” Marsh says in a statement about the settlement.

In addition to setting up a client compensation fund, Marsh has adopted a number of changes to its operations and its management practices.

The company says it has discontinued the practice of receiving compensation from insurers that is contingent upon the performance of entire blocks or books of business, and it says it has started giving clients complete information about all forms of compensation received from insurers.

The company will be adopting and implementing companywide, written standards of conduct for the placement of insurance, and it says it will be giving clients all quotes and terms that it receives from insurers, to help clients make informed insurance coverage decisions.

Marsh has named a chief compliance officer, and it has added 10 outside directors to its board. It also is setting up a board compliance committee.

Spitzer and Howard Mills, New York’s acting insurance superintendent, are calling the settlement agreement a “landmark agreement.”

“The settlement agreement restores confidence to the marketplace by requiring restitution to Marsh’s aggrieved clients, establishing model business practices Marsh will employ going forward, and instituting a system of full disclosure that enables all parties to know who is paying what, and to whom, when purchasing insurance,” Mills says in a statement.

Along with New York regulators’ statement, Marsh is distributing a statement separate from the statement it has released on its own. In the second statement, Marsh takes the opportunity to “apologize for the conduct that led to the actions filed by the New York state attorney general and superintendent of insurance.”

The conduct “was shameful, at odds with Marsh’s stated policies and contrary to the values of Marsh’s tens of thousands of other employees,” Marsh says.

The New York regulators’ statement, which includes the Marsh apology in Exhibit 1, appears on the Web at //www.oag.state.ny.us/press/2005/jan/marshsettlement_pr.pdf