While it is true that Mr. Spitzer's lawsuit precipitated stock drops for the nation's largest brokers and insurers, followed by a rash of shareholder class-action filings, it was hard to get experts to address state-of-the-market questions and those who did could foresee no directional change in sliding D&O prices.

David Bradford, executive vice president for Advisen in New York a provider of commercial insurance information, analytic and benchmarking tools said, “It may put the brakes on a little bit, but I don't think it's going to turn it.”

Recently, Mr. Bradford revealed that in third-quarter 2004, the average D&O policy renewed, for the first time, with a premium decrease?0.29 percent. Indeed, more policies renewed with a premium decrease (58 percent) than with an increase (33 percent) in the quarter, he noted.

“It is entirely dependent on how badly this blows up,” he said, adding that with respect to insurers implicated in the Spitzer case, “I'm not convinced that the market isn't overreacting temporarily as concerns the insurers' share prices.”

“The downward momentum of the overall casualty insurance market is going to continue to carry D&O with it. Something pretty outrageous is going to have to happen to turn that independently of the direction of the rest of the market. I just don't see this as being that cataclysmic,” he said.

Peter Taffae, president of Executive Perils, a Los Angeles-based wholesale brokerage, offered another reason for softening to continue. “Everybody, other than insureds, needs and wants prices to go up. But there's so much scrutiny on the industry right now, that it can't happen,” he said.

Still, he predicted insurers generally will show nice margins at year-end. “Insurance companies, right away, will stop paying all this stuff,” he said, referring to contingent commissions, noting that in the short term, the elimination of the expense would fall to the bottom line.

Offering still another view, an expert predicted that traditional commissions would rise in the long run, noting that the effect would be more necessary in management and professional liability.

“If the cost of procuring insurance, of claims advocacy by brokers [and] all of the servicing costs associated with an accounthad to be addressed by a combination of commissions and contingent compensation, then that suggests that if the contingent part goes away, one of two things will have to happen. Either brokers will have to reduce the level of service they provide, or they're going to have to increase commissions,” he said.

“In professional liability, claims tend to be more difficult and more complex. And brokers have really made an effort to hire lawyers and sophisticated claims professionals to provide claims advocacy services. The cost for that has to be addressed someplace,” he said.

Responding to the suggestion that a potential industrywide scandal, following three other situations that contributed to D&O losses across entire industries (like the mutual fund industry), might act like a fourth hurricane stabilizing property prices, this expert saw no common thread.

“If you look at all of the pricing-fixing activities being addressed by the New York attorney general, one would logically assume that insurers participate in theseas a way to make additional money. But if you look at the loss experience, particularly in professional liability, then this market must be [made up of] the most inept group of price fixers in the history of capitalism because they have had dreadful losses, and they don't seem to be able to get themselves back on track.”

If the alleged activities in fact happened, then insurers and brokers have been “addressing all the wrong issues,” he said. “There are fundamental issues related to pricing, coverage, limits and retentions that no one is prepared to take a tough position on.” Instead, market participants chose to address fundamental business problems “out on the edges, by playing with the expense side,” he added.

“This is the same insurance industry that watched [Mr.] Spitzer march through the investment banking [industry], march through the mutual fund industry, march through the hedge fund industry, and at no point did our industry look back at itself and say, Some of our practices could really be deemed analogous to this. We ought to fix them,'” he said.

Still, this expert predicted that bid-rigging practices that Mr. Spitzer alleges took place at the largest brokers and insurers won't be found at smaller firms. “Smaller players are allowing themselves to be identified by practices that may have nothing to do with how they conduct themselves,” he said.

Mr. Taffae also drew distinctions between large national brokers and smaller regional firms. Likening allegations about Marsh described in Mr. Spitzer's lawsuit to a system of airline hubs, he said that while insurers allegedly “had to pay to get a gate at a Marsh hub,” at regional brokers “all gates are open” and contingent agreements with all insurers are essentially the same.

“They're not selling gate access,” he said, adding that the agreements for regional brokers are real profit-sharing arrangements with an “element of risk” in the calculations. He also noted that an across-the-board elimination of such arrangements would be devastating to these smaller firms. “The vast majority rely heavily on profit-sharing arrangements. They need that to survive,” he said.

NU interviewed experts in the days immediately following Mr. Spitzer's lawsuit, as plaintiffs' law firms began to announce securities class actions and investigations into the handling of Marsh employees' pension plan investments.

No sooner did a lawyer specializing in defending brokers against errors and omissions claims predict that policyholder class actions would be the next wave, then the New York firm of Milberg Weiss Bershad & Shulman LLP announced an expanded policyholder action against all the leading national brokers and four insurers.

On Oct. 19, Milberg amended a policyholder suit first filed in August to accuse 35 firms of civil racketeering in a “massive scheme to manipulate the market for commercial insurance.” The class action complaint filed by OptiCare Health Systems Inc. on behalf of itself and other similarly situated plaintiffs, names Acordia, Aon Corp., BB&T Corp., Brown & Brown, Arthur J. Gallagher, Hilb Rogal & Hamilton, Hub International, U.S.I. Holdings, Willis Group Holdings, and all of the affiliates of these firms.

The OptiCare complaint amended and expanded from an August complaint which then named only Marsh, Aon and Willis adds bid-rigging to earlier allegations centered on the use of contingent commission arrangements known as placement service agreements. (The complaint also refers in broad terms to fees paid to wholesale brokers “as part of the same fraudulent scheme.”)

While not the first such policyholder action filed in 2004 (there was one filed against Aon in Chicago earlier this year), the charge of a conspiracy to violate the Racketeer Influenced and Corrupt Organizations Act in the OptiCare case carries severe potential implications in particular, treble damages, noted Peter Biging, an attorney for Lewis Brisbois Bisgaard & Smith LLP in New York, who discussed potential damages just before news of the expanded complaint broke.

He said that plaintiffs in such actions could seek return of premiums above what the market prices should have been absent bid-rigging, as well as disgorgement of commissions that were allegedly illicitly obtained, and punitive damages. In addition, if they can show a pattern of activity over a period of years “that involved use of the mails or wires, [then] there's potential for a RICO claim, which entitles the victor to treble damages.”

Mr. Biging said plaintiffs and defendants each have hurdles to overcome as these cases play out.

“To allege the existence of bid-rigging, my sense is you would need to have some kind of inside information,” he said, noting that while the work of the New York attorney general's office provides some evidenciary foundation, “it hardly can be said, in and of itself, to provide a factual basis for alleging that such conduct was engaged in by other brokersFraud is an allegation that you need to plead with specificity. You can't say there's smoke over there, so there probably should be fire over here.”

He added, however, that “in an environment where there are such detailed specific allegations” of a pattern of potential fraud by Mr. Spitzer (and potentially by insurance commissioners conducting their own investigations), “judges who read this stuff are human, too. They might be inclined to view the allegations with less of a jaundiced eye than fraud allegations are usually viewed with.”

Still, “it?s one thing to see if you can get this case off the groundIt's another actually proving it,” he said, noting that since excessive premiums are one element of damages, plaintiffs must show that there were other markets that could have been tapped to provide the same coverage at lower cost. It's doable, but “it's not necessarily something that would be easy,” he said.

For brokers and insurers, there are good defenses to the extent that contingency fee arrangements were disclosed to the client, the client was aware of them, and didn't have any objections. How can plaintiffs, “after the fact, say that this created some kind of a problem?” he asked. “They knew about it. In fact, these were well known to exist for many years.”

However, “to the extent that there's actual evidence that a broker had an opportunity to obtain a lower bid, dismissed it and asked for a higher non-competitive bid, that?s going to be difficult to defend directly, absent evidence that the coverage procured was more favorable, or that the trust developed in the insurer, its claims handling practices, and tangible or intangible benefits of staying with the existing insurer outweighed cost considerations,” he said.

As to the general question of whether brokers named in Mr. Spitzer's suit, in shareholder and pension suits, or in policyholder actions, will be able to recover judgment, settlement and defense costs from their own D&O and E&O insurance policies, experts agree that if regulatory investigations result in brokers being forced to pay back contingent commissions to their clients, such payments won't be covered.

Essentially, “that's disgorgement,” a legal expert said, referring to another case, Vigilant v. Credit Suisse First Boston, in which a New York appellate court ruled that $70 million of ill-gotten gains repaid in a settlement with securities regulators (which had accused the investment bank of abusive practices on initial public offerings) was not covered by an E&O policy and that related defense costs incurred were not covered, either.

Others noted that while there's no coverage for dishonest acts, where negligent acts can be severed from fraudulent ones, some states allow coverage for defense costs. But to the extent that pleadings allege dishonest criminal acts, insurers will likely reserve their rights at the outset, experts said.

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.