Garamendi Files Suit Against Four Insurers, Alleging Kickbacks

Insurance Commissioner John Garamendi (D) on Thursday filed suit against MetLife, Prudential Financial, Cigna and UnumProvident, alleging that they paid insurance broker Universal Life Resources "tens of millions of dollars in hidden kickbacks in exchange for winning contracts" with major U.S. companies, Reuters/Orange County Register reports (Reuters/Orange County Register, 11/19). According to authorities, such practices inflate the premiums employers and workers pay (Chan, Sacramento Bee, 11/19).

The suit comes as insurance regulators across the nation have launched investigations into the business practices of insurers and insurance brokers. New York Attorney General Eliot Spitzer (D) last month filed suit against property-casualty insurance broker Marsh & McLennan over practices related to the contingent commissions that the company receives from insurers for new business.

According to some critics, contingent commissions -- which insurance brokers receive when they reach volume or profitability targets -- provide brokers with financial incentive to place clients with insurers that pay the largest commissions.

In his lawsuit, Spitzer alleges that Marsh did not award contracts through competitive bidding as stated and fixed prices with insurers in some cases. Spitzer said that such anti-competitive practices, some of which are illegal, have contributed to insurance rate increases for employers and individuals. Spitzer said that his investigation would target "virtually every line of insurance."

Health insurers Aetna, Cigna and MetLife, as well as disability insurer UnumProvident, have received subpoenas from Spitzer. Last week Spitzer also filed suit against California-based ULR over practices related to contingent commissions (California Healthline, 11/16).

Garamendi's suit, filed in San Diego Superior Court, is the first to name insurance companies as defendants rather than only brokers. It alleges that the insurers paid ULR contingent commissions based on volume, levels of renewals and profitability of the business the broker brought to them.

Bonuses ranged from 3% to 5% of premiums, according to John Stoia, an attorney with San Diego-based Lerach Coughlin Stoia Geller Rudman & Robbins, which filed the suit on behalf of Garamendi. The insurers also paid ULR communication fees of $10 to $20 per employee, which were built into premiums, and provided "lavish gifts," travel benefits and loans to ULR to win business, the suit alleges.

The suit involves employer-sponsored lines of insurance and alleges violations of the state's Insurance Code laws, including antitrust activity. The suit seeks injunctions to stop the alleged illegal practices but does not seek damages.

Also Thursday, Garamendi announced the state had settled with ULR in its portion of the suit. ULR did not admit any wrongdoing or pay a fine but agreed to cooperate with the state in the investigation into the other four insurers (Levick/Gosselin, Hartford Courant, 11/19). ULR also agreed to ensure that in the future it would not direct business to insurers in exchange for undisclosed payments (Sacramento Bee, 11/19).

Garamendi said that attorneys in his office would begin interviewing ULR executives Friday, the AP/Milwaukee Journal Sentinel reports (Spagat, AP/Milwaukee Journal Sentinel, 11/19). He also said that other insurers not yet named in the lawsuit could become targets as a result of ULR's cooperation (Freeman, San Diego Union-Tribune, 11/19). Law firm Lerach Coughlin Stoia Geller Rudman & Robbins already has two private suits pending against ULR.

"We are in the very early pages in a very long and very sordid story about the insurance industry," Garamendi said (Hartford Courant, 11/19). He added, "We will be moving very vigorously against the four insurance companies using the information in the Universal Life files" (San Diego Union-Tribune, 11/19).

Cigna attorney Paul Salvaty said, "We don't believe Cigna in California violated any law or regulation." He added, "We don't know how Commissioner Garamendi can make a deal with ULR given [Spitzer's] allegations against (ULR) and before Commissioner Garamendi has completed his own investigation and learned the facts."

UnumProvident spokesperson Mary Guenther said she could not comment on the lawsuit but added, "We have been cooperating actively with other state regulators on a number of matters related to broker compensation and we intend to cooperate fully with Commissioner Garamendi" (Hartford Courant, 11/19).

David Gabianelli, an attorney for ULR, said, "Universal Life Resources is pleased the California Department of Insurance has chosen to work with the firm to reach an agreement on how ULR does business ... and to resolve the issue of how compensation is disclosed (Reuters/Orange County Register, 11/19). He added, "In the spirit of the agreement, ULR is committed to maintaining the highest standards of conduct in the industry."

MetLife and Prudential both declined to comment (Sacramento Bee, 11/19).

KPBS' "KPBS News" on Thursday reported on the lawsuit. Garamendi said the suit is part of an "East Coast/West Coast knockout punch" that he has planned against insurance companies that allegedly pay illegal kickbacks (KPBS, "KPBS News," 11/18). The complete transcript of the segment is available online.