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CHATTANOOGA, Tenn.--UnumProvident Corp. has reached settlements with New York Attorney General Eliot Spitzer and California Insurance Commissioner John Garamendi that will change the ways the disability insurer compensates brokers and consultants.
The agreement with New York resolves an investigation of deceptive practices in UnumProvident's compensation of producers in the sale of group insurance products. The practices included payments to brokers based on their ability to persuade clients to renew policies despite rate increases, and loans to brokers whose principal and/or interest rates could be reduced if brokers placed a sufficient amount of business with UnumProvident.
From 2000 to 2004, Unum provided more than $12 million in loans to brokers and consultants. It also purchased a 6.5% interest in USI Holdings Corp. common stock prior to its 2002 public offering, entitling Unum to a seat on the broker's board. UnumProvident also bought shares in other brokers, including Assurex Global and BenefitPoint Inc., according to the attorney general's office.
According to USI Senior Vp and General Counsel Ernest Newborn, most of UnumProvident's holdings in USI were sold in USI's secondary public offering in April 2004. In addition, Unum relinquished its board seat in May 2002. Any remaining holdings Unum has in USI have been deeded to a separately managed trust over which it has no legal ownership or beneficial ownership.
Assurex and BenefitPoint could not be reached for comment.
Under the settlement, Chattanooga, Tenn.-based UnumProvident agreed to provide full disclosure of broker compensation to employers and to stop making loans to, or obtaining undisclosed ownership interests in, brokers.
UnumProvident also has agreed to pay $15.5 million in policyholder restitution and a $1.9 million civil penalty to the state of New York. Eligible policyholders have until Aug. 1, 2007, to request a distribution.
UnumProvident may request to amend the agreement to allow for the payment of contingent commissions on substantially the same terms and to the same extent as permitted by agreements the New York attorney general has reached with other insurers. Otherwise, UnumProvident may only pay brokers and consultants "permitted compensation," as outlined in the agreement.
Under the settlement reached with California, UnumProvident agreed to: ensure that all compensation paid to brokers is disclosed to California customers prior to purchase; make the information publicly available on its Web site; not enter into any new financial relationships, including equity ownership and/or financing, with any brokers; and terminate existing loan relationships with brokers.
Moreover, UnumProvident no longer will be permitted to sponsor any production contests or similar award programs in California that provide compensation or remuneration such as trips, gifts or bonuses to brokers.
Under terms of both settlements, UnumProvident also agreed to cooperate with ongoing investigations into insurance industry producer compensation practices.
"The settlement eliminates incentives for brokers to act against their clients' interest, and ensures full disclosure of Unum's compensation arrangements," Mr. Spitzer said in a statement. "These reforms, many of which were conceived by Unum itself, will help resolve the integrity of the market and promote competition."
"We have worked cooperatively with the New York attorney general since questions were first raised about the industry's compensation practices," said Thomas R. Watjen, president of UnumProvident, in a statement. "We responded immediately by establishing what ultimately were viewed as industry-leading disclosure practices. This agreement is a natural extension of that effort. During our discussions we proposed to the attorney general a new compensation plan which is simpler and more transparent. This agreement incorporates our new approach, which we believe can be a model for our industry."
With regards to the California settlement, Mr. Watjen said: "We are pleased we have resolved this with California in a way that is good for our customers and brokers. We have worked closely with the California Department of Insurance throughout this process and believe that this resolution, much like our settlement agreement with the New York attorney general announced earlier, can be a model for our industry."
"I am pleased that as a result of this lawsuit a major insurer has agreed to tell its customers the amount and type of compensation it is paying to brokers and agents, and I call on all other insurers to follow suit," said Mr. Garamendi, California's insurance commissioner, in a statement. "As I have said since this department began investigating contingent commissions more than two years ago, brokers, agents and insurers owe their clients truth and honesty in their dealings."
Following the announcement of the settlements, New York-based Moody's Investors Service changed the outlook on UnumProvident's debt and financial strength ratings to negative from stable.
New York's investigation of Unum began in 2004 as an outgrowth of the attorney general's ongoing investigation of insurance industry broker compensation practices.
A spokesman for the attorney general declined to say whether Mr. Spitzer's office is investigating such practices among other insurers or producers at this time.
"All I can say is the attorney general is continuing his investigation," the spokesman said.
California's settlement is also part of the Insurance Department's continuing investigation and litigation involving such practices.
Following the settlement with UnumProvident, the California case, John Garamendi vs. Universal Life Resources et al., will continue against defendants Metropolitan Life Insurance Co., Prudential Insurance Co. of America, Live Insurance Co. of North America, Connecticut General Life Insurance, CIGNA Healthcare of California, CIGNA Dental Health of California Inc., Hartford Financial Services Group Inc., Hartford Life and Accident Insurance Co. and Hartford Life Insurance Co.
Both New York and California sued Universal Life Resources, a San Diego-based broker that was one of the leading producers of UnumProvident's business. Mr. Spitzer's suit, filed in November 2004, alleged that as much of two-thirds of ULR's annual brokerage revenues of about $25 million came from secret payments from insurers.
New York settled its suit against ULR and President and Chief Executive Officer Douglas Cox in December 2005 for $2 million in policyholder restitution. ULR also agreed to: limit its brokerage compensation to a single fee or commission, ban contingent commissions and communication fees, disclose all forms of compensation to its clients prior to the purchase of insurance, and monitor its insurance-related practices for five years.
California, meanwhile, won a permanent injunction and consent decree against ULR.
ULR has since gone out of business.