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NEW YORK--Units of Liberty Mutual Group Inc. will face charges of fraud and bid rigging related to brokerage compensation practices, after a trial court judge last week said New York officials' civil suit against the Liberty Mutual operations could proceed.
The State Supreme Court judge's ruling came in response to Liberty Mutual's motion for a dismissal of the charges, which were leveled in a May 2006 civil suit by then-New York State Attorney General Eliot Spitzer.
In his suit, Mr. Spitzer charged that the Boston-based insurer engaged in bid rigging, steering, reinsurance tying and other improper business practices as part of a massive scheme with New York-based Marsh & McLennan Cos. Inc. Marsh in 2005 paid $850 million in client restitution to settle Mr. Spitzer's 2004 suit against the brokerage, which charged that Marsh rigged bids and steered clients to maximize the contingent commissions it received from Liberty Mutual and several other insurers.
The amended complaint against Liberty Mutual further charges the company with inducing producers to breach their fiduciary duty to clients.
In his ruling last week, Judge Bernard J. Fried said the case will proceed against nine of Liberty Mutual's subsidiaries (see box). However, the holding company for Liberty Mutual was dismissed from the amended complaint on grounds of personal jurisdiction.
Liberty Mutual sought dismissal of the various charges for several reasons, including that agents and brokers do not owe a fiduciary duty to their clients and that, even if they did, Liberty Mutual did not induce any breach of such duties; and that the officials' complaint does not plead the fraud claims "with sufficient particularity," the judge's ruling states.
Judge Fried rejected those arguments, though, and gave Liberty Mutual 20 days to respond to the court order.
Reacting to the ruling, Liberty Mutual said it is both pleased and disappointed with the court's decision.
"We are pleased that Liberty Mutual Holding Co. was dismissed from the matter. We are disappointed that the court did not accept our substantive arguments. We continue to believe that the matter needs to be resolved through the judicial process. This is this first step in that process and we fully expect that we will prevail eventually," the company said in a statement.
Calls to New York Attorney General Andrew Cuomo's office were not returned, nor were calls to the offices of Illinois Attorney General Lisa Madigan and Connecticut Attorney General Richard Blumenthal, who brought similar allegations last year in lawsuits against Liberty Mutual.
Numerous insurers, including American International Group Inc., Zurich Financial Services Group and ACE Ltd., have settled charges over their alleged involvement in a bid-rigging scheme with Marsh.
Liberty Mutual is the only insurer that vowed to fight the charges, saying that its business practices have been lawful and calling officials' settlement demands "excessive and unreasonable" (BI, May 8, 2006).
Only one other industry company--broker Acordia Inc.--has said it was unwilling to settle such charges; late last year the broker and its parent, Wells Fargo Bank N.A., declared that they would vigorously fight claims by three states that it accepted nearly $200 million in undisclosed commissions from insurers (BI, Dec. 25, 2006).
One attorney said the dismissal of the Liberty Mutual holding company should not significantly alter the case.
"I think what the decision reflects is that there was no allegation of the holding company's active participation in the alleged scheme that would have an impact in New York justifying the exercise of personal jurisdiction over it," said David E. Wood, principal at Wood & Bender L.L.P. in Ventura, Calif., which represents corporate policyholders in disputes with insurers.
"If the end game is to get a large monetary settlement and an injunction against certain practices, then you want to make sure that the target of those goals has plenty of money and is the company actually doing the alleged wrongful acts in the marketplace, in the trenches," Mr. Wood said.
"If that's the case, then (Liberty Mutual's) subsidiaries would appear to satisfy both of those concerns," he said.