Major broker lawsuit on the way

The California insurance regulator is preparing lawsuits against several national insurance brokers and companies, people close to the insurance department said Wednesday, as investigations into the industry intensify.

John Garamendi, the California insurance commissioner, said Wednesday that he would file a suit in connection with the bid-rigging and price-fixing schemes laid out by Eliot Spitzer, the New York attorney general.

Last week, Spitzer sued Marsh & McLennan, the biggest insurance broker, and had three insurance company executives arrested, reports San Jose Mercury News.

According to Contra Costa Times, a group representing insurance brokers and agents said Garamendi's proposal may not work out so neatly in practice, however.

Fearing the increased liability of the new penalties, brokers might charge customers more for coverage or insurance recommendations, said Steve Young, general counsel for Insurance Brokers & Agents of the West, a Pleasanton-based trade group. Brokers also might stop making recommendations altogether, he said, and merely present options without analysis. That would serve consumers poorly, Young said, although he doubts such scenarios will actually come to pass.

"I would be willing to bet you money that the regulations the commissioner has proposed today will not be adopted," Young said. "In my view, he doesn't have legal authority to do everything he's trying to do here."

Lanny Thorndike, whose Century Shares Trust mutual fund has about a third of its assets in insurance stocks, is keeping his investments in Marsh & McLennan Cos. and American International Group Inc. as U.S. regulators expand their industrywide probe of improper sales practices.

Marsh lost almost half its market value since the world's largest insurance brokerage was sued Oct. 14 by New York Attorney General Eliot Spitzer for rigging insurance bids, a fraud that "jacked up" prices for companies and schools. Spitzer said his probe touches "virtually every line of insurance." American International's stock fell 14 percent in the past week, reports Bloomberg.