A California lawyer investigating insurance fraud for the state has filed a private civil racketeering lawsuit that accuses a West Coast broker and a half-dozen of the nation’s largest insurers of cheating employee-benefits plans through a hidden compensation scheme.
In the class-action complaint filed last week in San Diego, attorney John Stoia accuses closely held Universal Life Resources of accepting hidden fees to steer business to a handful of preferred insurers while representing itself to benefits plans as an unbiased broker. The lawsuit filed on behalf of an Intel employee in Arizona represents a new front in the widening assault by plaintiffs attorneys and regulators on longstanding compensation practices in the insurance industry.
As with New York Attorney General Eliot Spitzer’s civil case against brokerage giant Marsh & McLennan, the California lawsuit accuses Universal Life of accepting “secret payments” from a handful of insurers “to make sure that they, and not their competitors, got the business,” Stoia says. Employees paid increased premiums to offset the undisclosed kickbacks, he says.
The lawsuit poses a defense dilemma for insurers. Even if they erect arguments against Stoia’s private class-action complaint, they might also have to face him in the regulatory arena. He has been retained by California Insurance Commissioner John Garamendi to investigate and prosecute insurance fraud for the state.
Last week, Garamendi termed secret broker commissions “a serious problem that betrays the public’s trust” and proposed rules to prompt disclosures, backed by fines up to $10,000 per offense.
Universal Life President Doug Cox said the insurance brokerage “categorically denies” paying kickbacks to insurance carriers. Its alleged partners, although not named as co-defendants, are identified in the lawsuit as Aetna, Cigna, MetLife, Prudential Financial and UnumProvident. They denied wrongdoing or declined comment.
“We do not believe there is a factual basis for any claims that we violated the law,” said Cigna Vice President Wendell Potter.
MetLife spokesman John Calagna said the insurer “plans to vigorously defend itself against this action.”
One of Universal Life’s niche markets is serving employee-benefits plans such as Intel’s that offer group life and health insurance, as well as optional disability and accidental health coverage that is paid for by employees.
Citing another client, Brinker International, the lawsuit accuses Universal Life of soliciting an employee-benefits insurance proposal from Cigna in February 2003 with instructions Cigna should not disclose to the client that it was paying the broker a middleman’s fee.
Describing the middleman’s fee as a kickback, the lawsuit says Universal Life told Cigna the fee “should not be communicated to the client” without its consent. It said the cost could be “factored into” overhead.