business

The St. Paul Travelers Companies Inc. will pay three states $77 million to settle charges that it defrauded businesses by scheming to fix prices and by paying undisclosed commissions to brokers to win insurance contracts. It is the latest high-profile settlement concerning practices that once were common in the insurance business.

The settlement is the result of a two-year investigation by New York State Attorney General Eliot Spitzer, who has wangled more than $3 billion worth of fines and restitution from the nation's top insurance companies -- including Marsh & McLennan Companies, Zurich Financial Services AG and American International Group Inc.

Under the agreement, St. Paul Travelers, the second-largest business insurer in the country, will pay $37 million into a fund for policyholders, plus $40 million to Connecticut, Illinois and New York. By comparison, the largest fine levied by Minnesota against an insurance company was $2.5 million. Last week, the St. Paul-based company took a $42 million charge to second-quarter profit to help pay for the settlements.

"The fine won't cripple St. Paul Travelers, but it's not trivial," said Donald Light, a senior analyst with Celent, a Boston-based research and consulting firm.

Without admitting it violated any laws, St. Paul Travelers agreed to apologize for its conduct.

"St. Paul Travelers acknowledges that certain of its employees violated certain acceptable business practices and [the company's] own standards of conduct by engaging in improper bidding practices and certain ... activities," the insurer said in a prepared statement. "St. Paul Travelers apologizes and has enacted business practice reforms to ensure that these incidents do not occur again."

The settlement covers actions of the St. Paul Companies Inc. and Travelers Property and Casualty before the companies merged in 2004. The charges focused on two practices, known in the insurance industry as "bid rigging" and contingency commission payments.

In bid rigging, insurers offer a company artificially high bids to help a broker steer the business to a preferred client.

For instance, in June 2003, a client of the St. Paul wanted other firms to bid on its excess casualty coverage. The St. Paul wanted to raise the client's premiums 40 percent. Marsh & McLennan, which brokered the deal, asked other insurance companies to submit phony bids that were significantly higher than the St. Paul's, so it would appear that the St. Paul's offer was the best deal.

"Despite the wishes of the client, Marsh had no intention of opening St. Paul to competition," according to court documents.

State regulators also accused the St. Paul and Travelers of paying insurance brokers payments, known as contingency commissions, if they sent business their way. Spitzer argued that the companies should have disclosed the payments to customers. In essence, brokers violated their duty to customers in order to generate more commissions, he said. According to the settlement, St. Paul Travelers will stop paying commissions on excess casualty coverage through 2008. The company also agreed to support legislation that would ban such payments to brokers and agents.

But Light, of Celent, doubts such legislation will pass because contingency commissions are ingrained in the industry.

Thomas Lee • 612-673-7744