A UnumProvident Corp. unit and an insurance brokerage unit of Hilb, Rogal & Hobbs Company have settled a civil suit filed by Massachusetts Attorney General Tom Reilly.[@@]

The settlement, approved earlier this week by a state court judge in Boston, resolves allegations that UnumProvident’s Unum Life Insurance Company of America subsidiary may have violated a state life insurance purchasing contract in 2000 and 2001 by paying hundreds of thousands of dollars in undisclosed commissions.

Unum Life and the Hilb brokerage unit, O’Neill, Finnegan and Jordan, Boston, have agreed to pay a total of $1.3 million in damages, Massachusetts officials say.

Hilb, Glen Allen, Va., acquired O’Neill, Finnegan along with O’Neill, Finnegan’s parent company, Hobbs Group L.L.C., in 2002. Hilb says the Massachusetts suit deals with allegations about events that occurred before the Hobbs Group acquisition.

Hilb is “happy to settle the matter without an admission of wrongdoing” and looks forward to continue working with the state of Massachusetts, Hilb says in a statement.

At UnumProvident, “we chose to settle, but we did dispute a number of contentions,” says M.C. Guenther, a spokeswoman for the Chattanooga, Tenn., insurer.

The Massachusetts Group Insurance Commission, the agency that buys benefits for Bay State employees and retirees, hired O’Neill, Finnegan in the first half of 2000, when a group life contract issued by a unit of CIGNA Corp., Philadelphia, was about to expire. O’Neill, Finnegan rounded up 5 bids for a program that would provide basic group life, supplemental life, and accidental death and dismemberment coverage. The broker helped the Massachusetts Group Insurance Commission make Unum and CIGNA the finalists. The group insurance commission chose Unum, and the Unum group life plan took effect July 1, 2001.

The group insurance commission has a policy of refusing to let its brokers collect commissions, both to hold down costs and to avoid actual or potential conflicts of interest, according to the state’s complaint.

The state alleges in the complaint that Unum and O’Neill, Finnegan entered into a general special producer agreement shortly before the group insurance commission picked Unum to help it buy group life coverage.

The contract tied O’Neill, Finnegan’s compensation to the purchase of Unum insurance policies by O’Neill, Finnegan clients, the state alleges. The premium schedule called for Unum to pay commissions starting at 3% of premiums and stepping down to 0.5% as volume increased if O’Neill, Finnegan brought in 5 new business lines totaling $1.5 million, the state adds. Unum also paid block-management compensation that depended on persistency. Block-management commissions ranged from 0% to 2.3%, the state says.

During the first year the group insurance commission policy was in effect, O’Neill, Finnegan received $456,000 in commissions in $25 million in premium revenue, and the state estimates the broker could have received up to $575,000 per year for 5 years.

O’Neill, Finnegan collected a total of only $658,962 in commissions because the group insurance commission received a tip about the special producer agreement in January 2003, while fielding a sales pitch from an insurance broker., the state alleges.

O’Neill, Finnegan also gave Unum help with preparing its bid, its “best and final” offers and its presentation to group insurance commission, the state alleges.

The state cites, for example, one Unum e-mail message from Dec. 21, 2000, stating that O’Neill, Finnegan had disclosed to Unum that “we [Unum] are $1.07 million higher on basic life” and “$900,000 lower” on optional life, and had proposed a strategy for what was needed for Unum to win the bid.

The state quotes from a second Unum e-mail message, dated Dec. 28, 2000, which states that O’Neill, Finnegan had communicated clearly to the insurer that Unum was charging $1.07 million more than CIGNA for basic life insurance. “We need to come in at 1.04/$1,000, which is .01 below in-force but over Cigna’s current pre-BAFO [best and final offer] bid,” according to an excerpt of the e-mail included in the complaint.

The state alleges that Unum advised the group insurance commission that the state’s account was supposed to have a 0 commission structure and that an error had resulted in a payment to O’Neill, Finnegan of $28,518.79. The payment was supposed to be returned to Unum, the state says.

But, when O’Neill, Finnegan was talking to the group insurance commission, statements of what funds were recouped were “miscalculated and misreported,” the state says in its complaint.

Bob Carey, the group insurance commission’s director of policy and program management, says the commission began looking more closely at its broker relationships after hearing about New York Attorney General Eliot Spitzer’s investigation of Marsh & McLennan Companies Inc., New York.

“We are outraged at the performance of O’Neill, Finnegan and also very disappointed in the performance of Unum,” Carey says. “We don’t take this lightly.”

The Unum group life arrangement is set to expire June 30, 2006, Carey says. The group insurance commissioner is in the process of finding the broker that will help it put the group life program back out to bid.

UnumProvident is disputing the implication that the compensation paid to the broker increased the state’s costs, Guenther says.

Broker compensation is not included in the price of a policy, she says.

UnumProvident started working with the broker and the group insurance commission to settle the matter in early 2003 and later that year had reached a resolution, she says.

The failure to recoup the funds is a point we are disputing, Guenther continues. She also notes that UnumProvident has revamped its compensation practices.