Suit Traces Roots of Insurance Scandal

Updated from Dec. 23

Six years ago, American International Group(AIG Quote) had a problem.

Rival insurers were offering brokers sky-high commissions on a type of policy designed to shield corporate officers and directors from business liability, a trend AIG feared was costing it business in California's Silicon Valley. The solution, newly unsealed court papers show, was a system of incentive payments to the brokers that became the basis of New York Attorney General Eliot Spitzer's investigation into insurance industry kickbacks.

"We felt that the gap between what we pay as commission on average and what our competitors pay in commission for essentially the same type of policy was so great that it would cost us a fair amount of business," said Stephen Gold, the AIG executive, in a deposition taken last year in a pending California civil lawsuit. "We needed to narrow the gap somewhat."

The incentive payments, more commonly known in the insurance business as contingent commissions, satisfied the demands of both brokers and AIG. The insurance brokers -- or some of them, anyway -- got fatter paychecks, while AIG got more bang for its buck without having to raise its standard commission rate.

"We did not wish to increase the cost of doing business unilaterally without accomplishing our business goals," said Gold, an executive in AIG's domestic brokerage group in San Francisco, in the deposition. "Our business goal was to prevent the loss of our position in the market. Simply to raise the rate and create a higher cost on all of our business ... would ultimately be a cost that all of our clients would have to bear."

Gold added: "We were only going to make the extra payments if we got the result that we wanted to see between us."

Gold's deposition testimony was unsealed recently in a three-year-old suit filed by a New York firm under a California law that enables lawyers to act as private attorneys general and bring actions in the public's interest. The lawsuit, previously reported on by TheStreet.com, alleges that AIG, Allianz(AZ Quote), Chubb(CB Quote) and Hartford Financial(HIG Quote) all made incentive payments to induce the brokers to steer customers to them, even when it was "contrary to the best interests" of their clients.