Eliot Spitzer’s ongoing investigation into fraud, market manipulation, bid-rigging and conflicts of interest at the largest US insurance companies is shaking up the $1 trillion per year insurance industry, whose premiums comprise one-tenth of America’s $11 trillion Gross Domestic Product.[i]

Spitzer’s New York state probes are triggering similar investigations in other states, and forming the basis for lawsuits being considered by large insurance customers around the country. The scale of the scandal appears so far to be somewhere between the Enron debacle and the S&L scandals of the late nineteen eighties.

Because the insurance industry in the US is primarily regulated by the fifty states[ii], the scandal is also threatening to expose the ways in which under-financed, under-manned state regulators in many locations have been unable to adequately police the mega-corporations that dominate the national insurance industry.

In Albany, New York’s state capital, the scandal is also dramatizing the need for comprehensive campaign finance reform, and putting the spotlight on the campaign practices of major New York political players, from Governor George Pataki to Senator Charles Schumer.

By the advent of the 2006 New York Governor’s race, the twin scandals in the insurance industry and in Albany could provide a defining issue for any gubernatorial candidate with the intestinal fortitude required to address the need for systemic reforms – and deliver on promises of consumer safety and clean elections.

The Bombshell

In October, Spitzer filed a civil fraud action accusing the world’s largest insurance broker, Marsh Inc., of gouging customers in a series of complex schemes involving bid-rigging and kickbacks from major insurers. Spitzer’s office also kicked off a series of comprehensive probes of insurance companies engaged in nearly every aspect of the business, and accused several insurance providers of being co-conspirators in schemes designed to rig bids and pay kickbacks to get insurance business from brokers like Marsh.

Spitzer’s suit alleges that Marsh, Inc., and a select group of “insider” insurers defrauded customers, including corporations, city governments, school districts and individuals of billions of dollars in inflated premiums.

“. . .Our investigation found widespread evidence that brokers were receiving hidden payments, essentially kickbacks, from insurance companies,” Spitzer explained.[iii]

“Not only do insurance brokers receive contingent commissions to steer business,” Spitzer told the US Senate in November, “but many brokers, with the assistance and collusion of insurance companies, engage in systematic fraud and market manipulation in order to ensure that profitable and high volume business goes to a few selected insurance companies.”

The major law global firm of Morgan, Lewis, which has a thriving insurance industry recovery group specializing in recovering damages from large customers injured by fraudulent insurance brokers and insurers, reports that Spitzer’s probe is widening and could include subpoenas issued to major health insurers Aetna and Cigna, life insurer MetLife and disability provider Unum Provident.

“In addition, similar investigations are underway by insurance regulators and/or attorneys general in California, Connecticut, Pennsylvania, New Jersey and Ohio, and members of the plaintiff’s class action bar in New York, California and Illinois have commenced litigation as well,” reports Morgan, Lewis.[iv]

Spitzer contends that the fraudulent insurance industry practices induce brokers to steer business to preferred companies, resulting in higher costs for customers, and that the interlocking network of insurance brokers and their favored carriers “essentially creates a secret cartel based on hidden payments and preferential treatment. Like any cartel, however, this one results in higher prices for the public and a drag on the economy.”[v]