Chicago – Attorney General Lisa Madigan and Illinois Department of Financial and Professional Regulation (IDFPR), Division of Insurance Director Michael McRaith today announced a $27 million nationwide settlement agreement with Chicago-based Arthur J. Gallagher & Co.  

The settlement resolves an investigation which revealed that the insurance brokerage giant accepted millions of dollars from insurance companies in exchange for steering clients toward those favored companies.

The settlement requires Gallagher to pay back $27 million to clients, including Illinois businesses and policyholders, who were subjected to Gallagher's steering policy.  The policy urged Gallagher's brokers to direct their clients to pre-selected insurance carriers in order to achieve targeted levels of business with those carriers.  The pre-selected carriers would in turn reward Gallagher with lucrative bonuses, called contingent commissions, for delivering the high-volume insurance business to them.  

Gallagher never notified its clients that its policy of placing business with favored carriers to obtain millions of dollars in contingent commission profits potentially conflicted with its professed goal of recommending to each client the insurance policy that was in the client's best interests.

 Today's settlement prohibits Gallagher from engaging in any further contingent commission arrangements.  It further makes critical reforms to other business practices. Under the agreement, the Illinois Division of Insurance will verify Gallagher's compliance with these new business practice reforms.

“Our comprehensive investigation revealed Gallagher sought and obtained huge payments from insurers in return for steering them enough business to meet secret threshold targets,” Madigan said. “Gallagher never should have accepted these payments without fully and clearly disclosing that these targets and payments created a potential conflict of interest between Gallagher and its clients.  This settlement will guard against future conflicts of interest and help to return integrity to this industry.”

Using her authority under the Illinois Consumer Fraud and Deceptive Business Practices Act, Madigan formalized the settlement this afternoon.  This settlement sets forth Madigan's findings that Gallagher, the world's fourth-largest provider of insurance brokerage services, operated under an undisclosed and unwaived potential conflict of interest by seeking to maximize contingent commission dollars by directing business to pre-selected insurers.

Madigan praised Gallagher's full cooperation in the investigation and settlement process.  “To its credit, Gallagher recognized the need to quickly cooperate and provide my office with all the information we requested in our investigation.  Its Chief Executive Officer, Patrick Gallagher, personally participated in settlement discussions, which facilitated a prompt and fair resolution to this situation.”

            “We fashioned an agreement that prioritizes and vindicates the rights of Illinois policyholders and other Gallagher clients.  We acknowledge Gallagher's willingness to candidly address these issues and are optimistic that Gallagher will fully comply as we vigorously monitor its renewed promises of transparent trustworthiness,” McRaith said. “The Gallagher agreement demonstrates that effective insurance regulation stifles untrustworthy business practices and results in settlements that protect policyholders.  The Division of Insurance, as the state's insurance regulator, will continue to emphasize fairness and openness with policyholders and will work with law enforcement leaders like Attorney General Madigan, and industry leaders like Pat Gallagher, when insurance business practices are closely scrutinized and changed.”

Acting as a broker in the insurance industry, Gallagher solicits quotes from insurance companies, recommends insurance policies to its business and individual clients and negotiates contracts on their behalf.  According to Madigan, Gallagher purports to serve these clients by presenting itself as an “effective, trustworthy and unbiased manager” of its clients' risks.  However, Madigan found that despite this assertion, Gallagher aggressively sought and received bonus payments from insurance companies, beyond its regular commissions, when it steered sufficient business to those companies.  Although it had publicly disclosed the existence of contingent commissions, Gallagher never explained to its clients that these arrangements created a potential conflict of interest.

Madigan's investigation led to evidence, such as interoffice memos and internal Gallagher e-mails, which revealed Gallagher's plan.  For example, a December 4, 2003, e-mail urged Gallagher managers to “pump” enough insurance business into a small number of carriers offering “lucrative” contingent commissions so Gallagher could meet the commission thresholds of those carriers:  “Any opportunity which you or your staff have to support these [carriers], either through renewal retention or new business, will help generate additional revenue for AJG.”   Madigan also found that managers received personal bonuses when their branch offices helped hit the contingent commission targets.   In addition, Madigan's investigation revealed that Gallagher also accepted “hiring subsidies” from certain insurance carriers.   Under these undisclosed arrangements, which today's settlement prohibits, some carriers would pay for the salaries of some Gallagher brokers.  Gallagher would then assure the carriers that the brokers whose salaries were subsidized would deliver insurance business right back to the carriers. 

Madigan's investigation was conducted in cooperation with the IDFPR's Division of Insurance, which has primary responsibility under Illinois law for regulating the insurance industry.  With Gallagher's participation in the settlement agreement, the company does not admit any of the findings asserted in the agreement.  The settlement is a public record, and any violation of it can be treated as a separate violation of the Illinois Consumer Fraud law.

Assistant Attorney General Livia Dobrev, Special Litigation Bureau Deputy Chief Michael Fridkin, Special Litigation Bureau Chief Chaka Patterson and Public Interest Division Chief Benjamin Weinberg handled the case for Madigan's office. The IDFPR's Division of Insurance investigation was supervised by McRaith and Deputy General Counsel Robert Wagner.