Suit Traces Roots of Insurance Scandal

The suit, filed by Anderson Kill & Olick, alleges that the payments, which weren't disclosed to policyholders, amount to "bribes or kickbacks providing a strong monetary incentive to the included brokers." An AIG spokesman had no comment on the Gold deposition.

The allegations in the Anderson Kill lawsuit are similar to the ones lodged against the insurance industry in early October by Spitzer in a civil fraud suit filed against Marsh & McLennan(MMC Quote), the nation's largest insurance broker. The Marsh litigation focused a regulatory spotlight on the entire industry and led to a massive selloff in the sector and the ouster of Jeffery Greenberg, Marsh's former chief executive.

In the wake of the Spitzer investigation, much of the insurance industry has disavowed contingent commissions and incentive payments, with firms such as AIG, Marsh and Ace(ACE Quote) all saying they will no longer make or accept those payments. The investigation, which initially focused on property and casualty policies sold to big corporations, is now looking into similarly shady business practices in a wide spectrum of insurance products.

But most of the brokers on the receiving end of the incentive payments from AIG and the other insurers in the Anderson Kill lawsuit aren't huge firms like Marsh. Rather, the brokers tend to be small, privately owned concerns that peddle policies to small business and consumers. The California litigation is another indication of just how commonplace incentive payments were in the insurance business.

The unsealed court papers also reveal that some of the insurers took great pains to keep these payment agreements secret from the general public. Hartford and AIG, for instance, "contractually prohibited" brokers from disclosing the incentive payments to prospective insurance buyers, the court papers allege.

In fact, the insurers wouldn't unseal the documents in the litigation until Spitzer's investigation shook up the industry. Chubb was the last holdout, agreeing to lift the protective order on its court filings just a few days ago.