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




American International Group

(AIG) - Get Report





(CB) - Get Report


Hartford Financial

(HIG) - Get Report

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) - Get Report

, 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.

New York Attorney General Spitzer's fraud suit against Marsh charges that contingent fees, sometimes called "placement services agreements," are unethical and possibly illegal because they create an incentive for a broker to keep steering new business toward one insurer, even if another is selling cheaper policies. The suit also contends the fees, which some liken to kickbacks, have led to overcharging in the insurance industry.

The Marsh litigation has sparked a firestorm in the insurance business, with investors selling insurance stocks en masse and regulators in other states vowing to file their own actions.

In response to the regulatory feeding frenzy, Marsh and

Willis Group


, another big insurance broker, have announced they no longer will accept contingent fees.

Harckham and the lawyers at Anderson Kill, which specialize in insurance litigation, are well-acquainted with contingent fee deals used by Marsh, Willis and



, the nation's second-largest insurance broker. In 1999, Anderson Kill filed a similar public-interest lawsuit against the big three insurance brokers, challenging the legality of those arrangements. The brokers agreed to settle the litigation in 2001, but terms of the deal are confidential.

The insurers are playing hardball in Harckham's latest litigation too, filing much of the evidentiary material in the case under seal. Now that the insurance scandal has gone public, however, Harckham is considering asking the judge in the case to lift the seal.

Earlier this year, Harckham says both Spitzer's office and California Insurance Commissioner John Garamendi's office contacted him seeking information about the settled litigation with the big brokers and the pending case involving the small brokers.

David Brown, the attorney who heads Spitzer's investment protection division, says Anderson Kill has done some "good work" on the issue of contingent fees. He confirms that Spitzer and other state regulators are interested in showing how ordinary consumers were hurt by the behind-the-scenes deals between brokers and insurers.

"We are definitely interested in broadening this inquiry, and investigating smaller brokers is one

way," says Brown.

But with so many state regulators looking to join the fray, it's not clear yet who -- if anyone -- will be the first to target the alleged deals between insurers and small brokers.

It very well could be California's Garamendi, who earlier this week announced a new series of regulations that require brokers to "disclose any financial incentive" they receive for steering business to a particular insurance company.

Garamendi's office also is close to hiring plaintiffs' firm Lerach Coughlin Stoia Geller Rudman & Robbins to pursue litigation against the insurers.

The Lerach firm already has begun to target one small broker,

Universal Life Resources

, a California firm run by Douglas Cox. The firm has brokered insurance policies for a number of tech companies, both big and small, including



Sun Microsystems

. In a lawsuit filed a week ago under the same California private attorney general statute, the Learch firm alleges that Universal Life took kickbacks from a number of insurers. Cox denies the allegation.