MADIGAN: SETTLEMENT REACHED WITH THE HARTFORD; INVESTIGATION UNCOVERED UNLAWFUL FICTITIOUS QUOTING SCHEME
Illinois to Receive $3 Million Payment
Chicago – Illinois Attorney General Lisa Madigan, New York Attorney General Andrew Cuomo and Connecticut Attorney General Richard Blumenthal today announced a $115 million settlement agreement with one of the nation's largest property and casualty insurers over charges of improper fictitious quoting, steering of insurance business and allowance of improper market-timing in variable annuity products.
The agreement requires The Hartford Financial Services Group, Inc., a major provider of insurance for individuals and commercial insurance for businesses of all sizes, to pay back $5 million to policyholders impacted by The Hartford's role in an improper fictitious quoting scheme on excess casualty insurance policies.
Under this scheme, the company did not disclose to its policyholders that it was colluding with other insurers and brokers and providing fictitious quotes for excess casualty insurance. The amount that Illinois policyholders will receive has not yet been determined. Under the agreement, The Hartford also will pay $26 million in penalties and payments to the three states, including $3 million to Illinois.
Importantly, the agreement also requires The Hartford to reform critical business practices. Under the agreement, The Hartford will sharply curtail its use of “contingent commissions,” paying no contingent commissions on excess casualty insurance placements through 2008.
Contingent commissions are payments that insurers pay to brokers and agents in addition to the base commissions. Contingent commission amounts generally are based on the volume and profitability of the business a broker or agent produces for an insurance company. Madigan's investigation found that because contingent commissions are based on volume and profitability, they encourage brokers and agents to improperly steer clients to particular insurers, even if that is not in the clients' best interest.
The Hartford has agreed to stop paying such commissions in any line of insurance in which companies with 65 percent of gross written premiums do not do so. Under the agreement, The Hartford also agreed to provide new disclosures about ranges of compensation paid to brokers and agents by insurance products via a toll-free phone number and Web site later this year.
“Our investigation revealed that The Hartford provided fictitious quotes for insurance policies, which tainted insurance brokers' recommendations to their clients,” Madigan said. “The Hartford also paid contingent commissions to brokers in exchange for the brokers steering business to The Hartford, without the policyholders' knowledge or consent. This settlement, along with other similar settlements, will help restore integrity to the insurance markets, both for businesses and individual consumers.”
The Agreement also requires The Hartford to pay back $84 million to purchasers of The Hartford's variable annuity contracts who were impacted by market-timing practices uncovered by the New York Attorney General's investigation.
This settlement is a part of Madigan's office's wider, ongoing probe of misconduct in the insurance industry. Among the recent settlements are a $153 million settlement with Illinois-based insurer Zurich in March 2006, an $80 million settlement with ACE in April 2006, and a $77 million settlement with St. Paul Travelers in August 2006. Those settlements, which also included the New York and Connecticut Attorneys General, similarly dealt with fictitious quoting, contingent commissions and improper steering.
As a result of the earlier settlements, Zurich, ACE and St. Paul Travelers stopped paying contingent commissions on January 1, 2007 in certain insurance lines where the insurers that write 65 percent of the gross premium for that line of insurance do not pay, or have agreed to stop paying, contingent commissions. The insurance lines on which those carriers may no longer pay contingent commissions include homeowners, personal automobile, boiler and machinery, and financial guaranty, in addition to excess casualty insurance. Additionally, as the result of a December, 2006 settlement, Chubb Corporation ceased its use of contingent commissions on all of its insurance products beginning January 1, 2007.
Assistant Chief Deputy Attorney General Brent Stratton and Assistant Attorney General Janet Doyle are handling the case for Madigan's office.