Massachusetts AG Obtains $4 Million Judgment Against Insurance Brokerage Firm

December 20, 2007 -- BOSTON – Massachusetts Attorney General Martha Coakley’s Office has filed a complaint and a Consent Judgment against Boston-based insurance broker William Gallagher Associates Insurance Brokers, Inc. (“WGA”) for billing customers for unauthorized and undisclosed compensation and misleading customers about the brokerage firm’s contingent commission practices and involvement in reinsurance.

Contingent commissions, also known as profit sharing commissions, are controversial incentive-based compensation programs offered to brokers by insurance companies. The complaint was filed yesterday in Suffolk Superior Court. The Consent Judgment was filed today in Suffolk Superior Court, and is subject to approval by the court.

Under the terms of the Consent Judgment, WGA agreed to return $3,017,003 to eleven clients, pay at least $925,000 in sanctions and attorneys fees to the Commonwealth, and submit to a binding audit of its Energy and Environmental practice group. The Judgment also requires WGA to send statements to over seven hundred customers to correct prior allegedly false representations the company made regarding its employees’ knowledge of contingent commissions and WGA’s participation in reinsurance. Reinsurance is a form of insurance that insurance companies purchase to protect themselves against their policyholders’ claims. Going forward, WGA has agreed to provide enhanced compensation disclosures to customers by providing written notice of all fees and commissions.

“This investigation revealed certain deceptive practices that inflated insurance costs for numerous businesses,” said Attorney General Coakley. “We are pleased that under the Consent Judgment these businesses will recover their losses, and the practices will cease and be appropriately remedied. In addition, the relief set forth in this Consent Judgment adds needed transparency and fair dealing for businesses seeking various insurance coverages.”

The Attorney General’s investigation found that WGA charged clients undisclosed and unauthorized fees that exceeded customers’ insurance premiums by 20-100% and that the company double-billed certain customers by charging brokerage fees while simultaneously charging undisclosed standard commissions. To deceive customers into paying such charges, the company allegedly altered documents it received from insurance companies, secured misleading premium financing contracts, and kept two sets of accounting records, one to track actual numbers, and the other to generate fictitious records for clients. Through these practices, WGA took millions of dollars in compensation that customers believed were part of their insurance premiums, according to the complaint.

The investigation further uncovered that on several occasions, employees in WGA’s Energy and Environmental practice instructed insurance companies to increase the prices offered to a WGA customer. Additionally, WGA kept a $125,000 premium refund that it should have returned to its client.

The complaint alleges that in 2004, in an effort to quell customer concerns about contingent commissions, WGA falsely represented to clients that it did not inform its Account Executives of the details of WGA’s contingent commission plans. According to the complaint, WGA provided information about these plans to its Account Executives and stressed placing and renewing business with insurers that paid WGA lucrative contingent commissions.

The complaint further elaborates:

* Nearly all of WGA’s managing Account Executives were aware that the insurance company The Chubb Corporation (“Chubb”) loaned nearly three million dollars to WGA and that Chubb would forgive this loan and accrued interest under WGA’s contingent commission program with Chubb.
* WGA’s CFO wrote in his 2003 self evaluation that he monitored WGA’s contingent commission results and analyzed “…what agreements would be most lucrative (and where we should direct our business), which would be salvageable (and the associated trade-off) and which were unattainable. Communication was provided to staff during [management] and Sales Meetings.”
* A former WGA employee wrote in an email that she was “pushed” to renew a customer’s policy with Chubb even though she felt that better pricing and terms were available from another insurance company
* After insurance market Lloyds of London (“Lloyds”) lowered its commissions in 2002, WGA’s President suggested “…let’s put our Lloyds business with Chubb where we get Profit Sharing.”

Finally, thecomplaint alleges that WGA owned an equity interest in a Chubb-sponsored reinsurance company called Mountain View Indemnity, Ltd. (“MVI”). Through MVI, between 1999 and 2004, WGA reinsured a portion of over one hundred insurance policies that belonged to its clients, thereby creating a conflict of interest that WGA failed to disclose and actively misrepresented to customers.

Consumers are urged to report unfair or deceptive practices to the Attorney General’s Insurance and Financial Services Hotline at (888) 830-6277.

This matter was handled by the Insurance and Financial Services Division of Attorney General Coakley’s Office. Resolution was handled by Investigations Supervisor Arwen Thoman and Assistant Attorneys General Glenn Kaplan and Claire Masinton based on an investigation conducted by Thoman, Kaplan, Assistant Attorney General Quentin Palfrey, and Division staff Nathan Rawding, Danielle Wood, and Vivien Chen.

Source: Massachusetts Attorney General