Mention insurance fraud and most people imagine a sudden blaze that takes out a failing store. Or the swing of a crowbar to nudge a wrecked car into the "totaled" column.
But if Eliot Spitzer is right, the term may soon bring to mind questionable, sometimes criminal, practices by the insurance companies themselves and the commission-based middlemen who steer business their way.
Last Thursday, the New York attorney general filed a civil suit against the world's largest insurance broker, Marsh & McLennan, also naming a handful of insurers. Mr. Spitzer charges that the brokerage rigged bids - giving the appearance of competition when an insurer had already been awarded a sale - and took from insurers "steering fees" worth hundreds of millions of dollars.
Adding credibility to his case, two executives of the American International Group, one of four insurers named, pleaded guilty in a separate case to criminal bid-rigging charges.
Spitzer - who just a year ago took aim at the investment-brokerage and mutual-fund industries - announced what he called a broad, deep, and "disappointing" six-month investigation that should put a lot of industry players on tenterhooks. "Virtually every line of insurance," Spitzer said, "is implicated."
For now, businesses and municipalities - holders of the biggest policies - appear to be the most affected, say experts. But as an expected shakeout of this byzantine industry unfolds, even policyholders focused on their cars, homes, and health will probably be left reexamining the way they shop for coverage.
"This is an earthquake," says Keith Crocker, professor of insurance and risk management at Penn State's Smeal School of Business. "It's been clear that contingent commissions ... have represented a potential conflict of interest for years." Some outside action, he says, has only been a matter of time.
No federal regulator governs the rough-and-tumble industry, notes Professor Crocker. And insurers fighting for market share have long given additional income to the agents and brokers who give them the most business. These depend on the size of the business, and are called contingent commissions.
The commission-fee structure and bid- rigging are separate issues, says Neil Doherty, professor of insurance and risk management at the University of Pennsylvania's Wharton School. Although commissions are widespread, they're not illegal, Professor Doherty says, and it's not clear that bid-rigging, which is illegal, is that widespread. But he agrees with Crocker that attention to the issue is important. "This compensation structure doesn't make it clear at all on whose behalf the brokers really are acting."
Part of the confusion may stem from the vast number of different arrangements. "There are so many ways brokers are compensated," says Barry Meiners, a spokesman for the Council of Insurance Agents & Brokers. "It's a relationship between the company and each individual broker, and some of those things are negotiated."
"Allegations of fraud are just that - allegations," adds Ken Crerar, CIAB president, in a statement. "And if true, those who commit fraud will pay a price, appropriately." The council, he says, recommends that its members disclose to clients all of their income.
Doherty says a broader use of negotiated fees, versus ones based on percentage of premiums, would boost competition and benefit consumers. Marsh has already announced a suspension of contingent commissions, as have several insurance companies.
Still, as in last year's mutual-fund investigation, more brokerages are likely to be fingered, some experts say. And the business side is probably just "the thin edge of the wedge," says Robert Hunter, insurance director at the Consumer Federation of America.
As the sweep widens, Mr. Hunter says, it could hit personal lines of insurance, where he says agents are at risk of lawsuits because of contingent commissions that are related not to volume, but to loss levels.
"Let's say I'm the agent, and I'm at a level where if I report many more losses in this quarter my income will go down," he explains. "And you come to me with a $1,000 fender bender. 'Is this covered or not?' you ask me. Well, you can see the conflict."
All consumers can do, says Hunter, is pay attention. Only with direct writers, such as Geico or USAA, is no commission involved, he explains; their agents are salaried employees. Then there are "captive agents." Go to a dedicated State Farm agent, and you are in effect going to State Farm.
An independent agent may represent 10 different companies, he says. It can't hurt to ask about potential conflicts. "Some might be offering incentives you don't know about," he says.