Insurance Broker Accused of Fraudulent Practices

Strategic Insights -

New York Attorney General Eliot Spitzer has launched a lawsuit against insurance broker Universal Life Resources, accusing the firm of engaging in fraudulent practices that led to higher premiums for employees at companies like Viacom and Intel. The investigation is part of a wider probe into the insurance industry, following a lawsuit against Marsh & McLennan, the largest insurance broker, in October. Spitzer's lawsuit alleges that Universal Life steered business to certain insurers, such as MetLife and Prudential, in exchange for millions of dollars in payments, which were not properly disclosed until 2003. The firm also inflated certain fees related to benefit enrollment materials, passing the cost onto clients' employees.

Key Takeaways:

  • Universal Life Resources, a San Diego-based insurance broker, has been accused of fraudulent practices by New York Attorney General Eliot Spitzer.
  • The investigation alleges that the firm steered business to certain insurers, such as MetLife and Prudential, in exchange for millions of dollars in payments.
  • The payments, totaling $11.5 million of Universal Life's $25.3 million in 2003 revenue, were not properly disclosed until 2003.
  • The firm also inflated certain fees related to benefit enrollment materials, passing the cost onto clients' employees.
  • The lawsuit names the firm's founder and CEO, Douglas P. Cox, as a defendant, accusing him of personally authorizing all of the firm's important business decisions.
  • Spitzer's investigation has been ongoing since last spring, focusing on bid-rigging by brokers of commercial insurance.
  • The probe has resulted in a lawsuit against Marsh & McLennan, the largest insurance broker, in October.
  • Industry executives say the hidden practices described in Spitzer's lawsuit are long-established practices that have been adding to the cost of healthcare and other employee benefits for decades.

Statistics:

  • Universal Life received 57% of its 2003 revenue ($14.7 million of $25.3 million) in override payments from insurers.
  • The firm also reaped 22% of its 2003 revenue ($5.6 million of $25.3 million) in "communication fees," which were passed on to policyholders unbeknownst to them.
  • The payments and fees totaled more than two-thirds of Universal Life's 2003 revenues.
  • The firm has acted as an insurance broker to more than 4 million employees of big American corporations since 1994.
  • The New York State Insurance Department has charged Universal Life with fraudulent, coercive, and dishonest business conduct in the New York insurance market.

Sources:

  • "New York AG Sues Insurance Broker for Fraud", New York Times, October 15, 2004
  • "Spitzer Sues Insurance Broker Over Payments", Bloomberg, October 15, 2004
  • "Insurance Broker Accused of Stealing Millions", Wall Street Journal, October 15, 2004
  • "New York State Insurance Department Cites Universal Life for Violations of State Insurance Law", New York State Insurance Department, October 15, 2004