'Bribes' Are Rife in Insurance Industry, Suit Alleges

Updated from 1:31 p.m. EDT

A lawsuit that alleges some of the biggest insurance companies in the world have long bribed insurance salespeople to push their policies at the consumer level looks headed for trial in California -- and has captured the interest of regulators including Eliot Spitzer.

For the past three years, a lawsuit challenging these payments has been winding its way through the California court system, surviving challenge after challenge from the insurance industry.

More than a thorn in the side for the industry, the lawsuit could serve as a blueprint for regulators who are eager to show how some insurance companies were willing to pad the wallets of anyone who will push their product.

"It's smaller brokers and agents who are serving the consumers," says Finley Harckham, a partner with Anderson Kill & Olick, the New York law firm that filed the suit in Superior Court in San Francisco. "The only way to effectively get relief for the small consumer is to go after the insurers."

Indeed, the lawsuit alleges that Allianz(AZ Quote), American International Group(AIG Quote), Continental, Chubb(CB Quote) and Hartford Financial(HIG Quote) all made the undisclosed payments to induce the brokers to steer customers to them, even when it was "contrary to the best interests" of their clients.

The suit alleges the payments, which weren't disclosed to policyholders, amount to "bribes or kickbacks providing a strong monetary incentive to the included brokers."

Harckham's firm filed the suit, titled "Insurance Broker Commission Litigation," under a California law that enables lawyers to act as private attorneys general and bring actions in the public's interest.

Harckham says the payments have been going on for years and are no different from the so-called contingent-fee deals Spitzer's office has attacked in his civil fraud suit against Marsh & McLennan(MMC Quote), the nation's biggest insurance broker.

"These are written contracts which set forth how these commissions are supposed to work," says Harckham. "It works essentially the same way as the ones that are alleged in the suit again Marsh."

But Charles Kavitsky, CEO of the Fireman's Fund Insurance Co., a division of Allianz, stressed that the California suit is a separate and unrelated matter.

"This civil litigation, filed in 2001, is no way related to the illegal and criminal rigged-bidding and price-fixing practices that have surfaced in the suit filed by the NY AG," Kavitsky said.

Spokespersons for AIG and the Hartford declined to comment. Attorneys and officials for the other insurers were not available for comment.