T he second target in New York Attorney General Eliot Spitzer’s war against alleged broker misconduct may be small, but its clients aren’t.
After taking on brokerage giant Marsh & McLennan Companies Inc., Spitzer on Friday filed a fraud and antitrust lawsuit against Universal Life Resources Inc., a San Diego-based life and disability broker with $25.3 million in 2003 revenues, and its owner, Douglas P. Cox.
Like the Marsh lawsuit, the suit against ULR charges the broker with steering business to insurers that paid it secret override commissions. In addition, the suit charges ULR with extracting other undisclosed fees that underwriters passed on to policyholders through higher premiums and actively concealing the payments from clients.
The clients allegedly defrauded include Ashland Inc., Dell Inc., Marriott International Inc., Safeway Inc., United Parcel Service Inc., Viacom Inc. and other well-known companies, according to the complaint.
The suit also cites three insurers--UnumProvident Corp., MetLife Inc. and Prudential Financial Inc.--for participating in the alleged schemes.
"Today’s case demonstrates that the corrupt practices first laid bare in the Marsh suit are present in additional sectors of the industry," Spitzer said in a statement announcing the suit against ULR. "Secret payoffs and conflicts of interest that infected the market for property and casualty insurance have taken root in the employee benefits market as well."
ULR representatives could not be reached for comment.
Unum, Prudential and MetLife representatives said the insurers are cooperating but declined to comment further.
ULR has recently been the target of other lawsuits leveling similar allegations. Lawyers representing an Intel Corp. employee filed a proposed class-action suit against the broker in a San Diego federal court last month, charging that ULR took secret payments to steer business to certain insurers. United Policyholders, a California consumer group, earlier sued ULR in a California state court for allegedly failing to disclose contingent commission agreements.
Cox, ULR’s president and CEO, has denied these charges and said last month that ULR "maintains proper relationships with its clients and their insurance carriers."
Privately held ULR, with 80 employees, specializes in placing group life, disability and other coverages for Fortune 1,000 companies.
In 2003, ULR generated $565.6 million in premiums for MetLife, $214.3 million for Prudential and $101.6 million for Unum, the suit says.
While it claimed undivided loyalty to its clients--and included a provision in client contracts stating that it "shall accept no compensation of any kind whatsoever from any insurance company"--ULR generated almost half of its revenue from undisclosed override commissions based on volume, renewal rates and profitability, the complaint charges. The broker also reaped excessive and undisclosed "communications fees" for informational material distributed to employees, the cost of which insurers charged back to insurance plan participants, the suit alleges.
Of ULR’s $25.3 million in 2003 revenues, $11.5 million came from overrides and $5.6 million from communications fees, the suit says.
The broker consistently steered business to Unum, Prudential and MetLife to gain override commissions and shut out insurers that would not join "the club," the suit says. Minnesota Life Insurance Co., for example, refused to make override payments unless ULR disclosed them to clients, and the broker refused to do business with the insurer afterwards, the suit says. Aetna Inc. ended an override agreement with ULR in 2001 and has had "virtually no success" winning new business from the broker since then, according to the complaint.
Spitzer’s suit cites several clients that ULR has allegedly defrauded, including:
Washington, D.C.-based hotel operator Marriott, which bought disability coverage from Unum through ULR in 2003. According to the complaint, ULR rigged the list of three "finalists" competing for the Marriott account by pushing out a low-bidding insurer that had no override agreement with the broker.
New York-based media giant Viacom, which earlier this year bought group life and accident coverage from Prudential through ULR. According to the complaint, ULR persuaded Prudential to state that its benefit communications fee was the same as ULR’s--$10 per employee--when Prudential actually charges only $3.45 per employee. Viacom hired ULR for the communications job.
Round Rock, Texas-based computer maker Dell, which hired ULR in 2001 to place employee life insurance coverage. While ULR wanted to place the business with Unum, the insurer said it could submit the lowest bid only if it did not pay the broker a $120,000 fee called for in a request for proposals. ULR knew that override commissions would make up for the lost fee but also feared that Unum’s failure to report the fee in a U.S. Department of Labor filing on the Dell plan would start "red flags flying" at Dell, the suit says. ULR persuaded Unum to make a false filing reporting the $120,000 payment even though no such payment was made, the suit charges.
Spitzer’s suit levels fraud, antitrust and other charges and seeks disgorgement of all ULR profits arising from the alleged illegal activity.
Industry analysts say the ULR suit is likely to have less impact on the life/health insurance industry than the Marsh suit is having on the property/casualty industry, in part because no benefits broker is as dominant as Marsh is in the property/casualty business.
"Nobody has quite the same significance on the life side," says Rodney Clark, director of financial services for Standard & Poor’s Corp. in New York.
"The allegations are serious, (but) the dollars are relatively minor," says John Ward, chairman of the Cincinnati-based Ward Group.
From the November 15 issue of Business Insurance. Written by Douglas McLeod and Gloria Gonzalez.