The lawsuit also charges that Liberty Mutual repeatedly rigged bids for excess casualty insurance as part of an anti-competitive customer allocation scheme led by accomplices at the Marsh Inc. brokerage.

“It is simply appalling that a major financial institution would rig bids and induce brokers and agents to abuse their position of trust with the insurance-buying public,” Mr. Spitzer said.

In its lawsuit, New York seeks disgorgement of Liberty Mutual's illegal profits from any allegedly rigged placements, restitution to injured policyholders and damages–including punitive and treble damages for the company's illegal business practices.

Mr. Spitzer said that from 2001 through 2004, Marsh repeatedly solicited from Liberty Mutual and other insurers fake bids–called “B quotes”–that were intentionally higher or otherwise less favorable to the customer in order to “support” or “protect” the bid of a favored carrier.

Through this scheme, he said, “Marsh was able to deceive its clients into thinking that the insurance policies and premiums it offered were the result of true competition among insurers.”

In August 2005, a former Liberty Mutual executive, Kevin Bott, pled guilty to criminal charges in connection with his bid-rigging conduct while employed at Liberty Mutual.

In his plea elocution, Mr. Bott said that in many instances, “brokers at Marsh instructed me to submit protective quotes on certain pieces of business where Marsh had predetermined which insurance carrier would win the bid…I understood that such quotes were intended to allow Marsh to maintain control of the market and to protect the incumbent [carrier].”

The Liberty Mutual statement said two former lower-level employees seriously violated “our trust and our standards of conduct in their quotation activity.”

However, the carrier added, more widespread “allegations of wrongdoing regarding commission payments and reinsurance brokering are incorrect. Liberty Mutual's conduct in both areas was appropriate and lawful…Liberty Mutual has a culture not just of compliance, but of 'doing the right thing.'”

Liberty Mutual added that “despite cooperating with the attorney general's investigations for nearly two years, we have been unable to reach a reasonable consensual resolution. Thus it is in the best interest of our policyholders and employees that we vigorously defend these allegations and allow the judicial process to work.”

The Spitzer suit is the latest chapter in the long saga that began in October 2004 with allegations of bid-rigging against Marsh. The insurance broker–the largest in the world–eventually settled with Mr. Spitzer's office for $850 million.

The still unfolding scandal led to the major brokers abandoning contingency commissions and several states adopting laws aimed at regulating broker compensation methods.