Gallagher, the world’s fourth largest insurance brokerage firm, entered into a settlement with the attorney general and insurance department of
Chicago – Attorney General Lisa Madigan and Illinois Department of Financial and Professional Regulation (IDFPR), Division of Insurance Director Michael McRaith today announced a $27 million nationwide settlement agreement with Chicago-based Arthur J. Gallagher & Co.
The settlement resolves an investigation which revealed that the insurance brokerage giant accepted millions of dollars from insurance companies in exchange for steering clients toward those favored companies.
The settlement requires Gallagher to pay back $27 million to clients, including
Gallagher never notified its clients that its policy of placing business with favored carriers to obtain millions of dollars in contingent commission profits potentially conflicted with its professed goal of recommending to each client the insurance policy that was in the client’s best interests.
Today’s settlement prohibits Gallagher from engaging in any further contingent commission arrangements. It further makes critical reforms to other business practices. Under the agreement, the Illinois Division of Insurance will verify Gallagher’s compliance with these new business practice reforms.
“Our comprehensive investigation revealed Gallagher sought and obtained huge payments from insurers in return for steering them enough business to meet secret threshold targets,” Madigan said. “Gallagher never should have accepted these payments without fully and clearly disclosing that these targets and payments created a potential conflict of interest between Gallagher and its clients. This settlement will guard against future conflicts of interest and help to return integrity to this industry.”
Using her authority under the Illinois Consumer Fraud and Deceptive Business Practices Act, Madigan formalized the settlement this afternoon. This settlement sets forth Madigan’s findings that Gallagher, the world’s fourth-largest provider of insurance brokerage services, operated under an undisclosed and unwaived potential conflict of interest by seeking to maximize contingent commission dollars by directing business to pre-selected insurers.
Madigan praised Gallagher’s full cooperation in the investigation and settlement process. “To its credit, Gallagher recognized the need to quickly cooperate and provide my office with all the information we requested in our investigation. Its Chief Executive Officer, Patrick Gallagher, personally participated in settlement discussions, which facilitated a prompt and fair resolution to this situation.”
“We fashioned an agreement that prioritizes and vindicates the rights of
Acting as a broker in the insurance industry, Gallagher solicits quotes from insurance companies, recommends insurance policies to its business and individual clients and negotiates contracts on their behalf. According to Madigan, Gallagher purports to serve these clients by presenting itself as an “effective, trustworthy and unbiased manager” of its clients’ risks. However, Madigan found that despite this assertion, Gallagher aggressively sought and received bonus payments from insurance companies, beyond its regular commissions, when it steered sufficient business to those companies. Although it had publicly disclosed the existence of contingent commissions, Gallagher never explained to its clients that these arrangements created a potential conflict of interest.
Madigan’s investigation led to evidence, such as interoffice memos and internal Gallagher e-mails, which revealed Gallagher’s plan. For example, a December 4, 2003, e-mail urged Gallagher managers to “pump” enough insurance business into a small number of carriers offering “lucrative” contingent commissions so Gallagher could meet the commission thresholds of those carriers: “Any opportunity which you or your staff have to support these [carriers], either through renewal retention or new business, will help generate additional revenue for AJG.” Madigan also found that managers received personal bonuses when their branch offices helped hit the contingent commission targets. In addition, Madigan’s investigation revealed that Gallagher also accepted “hiring subsidies” from certain insurance carriers. Under these undisclosed arrangements, which today’s settlement prohibits, some carriers would pay for the salaries of some Gallagher brokers. Gallagher would then assure the carriers that the brokers whose salaries were subsidized would deliver insurance business right back to the carriers.
Madigan’s investigation was conducted in cooperation with the IDFPR’s Division of Insurance, which has primary responsibility under
Assistant Attorney General Livia Dobrev, Special Litigation Bureau Deputy Chief Michael Fridkin, Special Litigation Bureau Chief Chaka Patterson and Public Interest Division Chief Benjamin Weinberg handled the case for Madigan’s office. The IDFPR’s Division of Insurance investigation was supervised by McRaith and Deputy General Counsel Robert Wagner.
ITASCA, Ill., May 18 -- Arthur J. Gallagher & Co. (NYSE: AJG) today reached a comprehensive agreement with the Illinois Attorney General and the Director of Insurance of Illinois to resolve issues related to industry-wide investigations surrounding contingent commissions. There was no lawsuit involved nor were there any findings of unlawful or deceitful conduct or that any client had been disadvantaged. Gallagher admitted no wrongdoing or liability and is not required to issue an apology.
Specifics of the agreement include:
-- Creating a $27 million fund for certain retail clients. No portion of the fund represents a fine or a penalty.
-- Eliminating contingent commissions for retail clients (in October 2004, Gallagher voluntarily announced it would not enter into retail contingent commission agreements beginning January 1, 2005).
-- Disclosing compensation for services to retail clients.
-- Providing enhanced training for employees in business ethics and compliance matters.
-- Creating a Compliance Committee of the Board of Directors.
J. Patrick Gallagher, Jr., President and Chief Executive Officer, said, "We are pleased to have concluded this matter with both the Illinois Attorney General and the Illinois Director of Insurance and we appreciate their professionalism. Gallagher has been serving our clients for over 77 years, and in 1984 we institutionalized our 25 point "
Gallagher will host a webcast conference call on Thursday, May 19, 2005 at 9:00 a.m. CT to review the settlement. To listen, please go to http://www.ajg.com .
Arthur J. Gallagher & Co., an international insurance brokerage and risk management services firm, is headquartered in
This press release may contain certain forward-looking statements relating to future results. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expected, depending on a variety of factors such as changes in worldwide and national economic conditions, changes in premium rates and in insurance markets generally and changes in securities and fixed income markets as well as developments in the area of tax legislation. Please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, for a more detailed discussion of these facts.
by Sally Roberts
ITASCA, Ill.—Arthur J. Gallagher & Co. will pay $27 million in restitution to policyholders and reform its business practices to settle investigations by the Illinois attorney general and the director of insurance of Illinois related to its compensation practices, the Itasca, Ill.-based brokerage announced Wednesday.
No lawsuit was filed by the state authorities, and Gallagher admitted no wrongdoing or liability and is not required to issue an apology.
Under the terms of the settlement, Gallagher, the world's fourth largest brokerage, agreed to create a $27 million fund for certain retail clients; to cease collecting contingent commissions on retail business; to disclose compensation for services; to provide enhanced business ethics training for employees; and to create a compliance committee of the board of directors.
In a statement, Illinois Attorney General Lisa Madigan said her investigation into Gallagher's compensation practices revealed that the brokerage accepted millions of dollars of contingent commissions from insurers in exchange for steering clients their way.
"Gallagher sought and obtained huge payments from insurers in return for steering them enough business to meet secret threshold targets," Ms. Madigan said in the statement. "Gallagher never should have accepted these payments without fully and clearly disclosing that these targets and payments created a potential conflict of interest between Gallagher and its clients."
Citing interoffice memos and internal e-mails, Ms. Madigan said her investigation found that Gallagher managers received personal bonuses when their branch offices helped hit contingent commission targets and that the brokerage accepted "hiring subsidies" from certain insurers. Under these undisclosed arrangements, some insurers would pay for the salaries of some Gallagher brokers in return for insurance business.
Last month, Gallagher set aside $35 million to settle investigations related to its use of contingent commissions (BI, May 2). "We are pleased to have concluded this matter with both the
Gallagher's agreement follows similar settlements made by the world's three largest brokerages: Marsh & McLennan Cos. Inc., Aon Corp. and Willis Group Holdings Ltd.