Gallagher Drops Incentive Fees, GetsSubpoena

Arthur J. Gallagher announced last week that it will end thepractice of taking contingency commissions as a retail broker bythe beginning of next year and that it has received a subpoena fromConnecticuts attorney general concerning possible antitrustviolations.

The Itasca, Ill.-based insurance broker said Connecticut seeksinformation concerning possible violations of the states antitrustlaws in connection with the solicitation of bids for insurance.

Connecticut Attorney General Richard Blumenthal said he wasconducting his own investigation based on complaints from riskmanagers in the state back in May, a few months after New YorkAttorney General Eliot Spitzer started his own investigation.

During an analysts conference call, J. Patrick Gallagher Jr.,president and chief executive officer, said the firm has notreceived a subpoena from Mr. Spitzer in his probe of contingencyfees.

He emphasized that Gallagher is different from the globalbrokersMarsh, Aon and Willisin that its business is themiddle-market and negotiations are done through decentralized fieldoffices. Because of this, Gallagher does not exert the kind ofleverage on accounts that enabled executives at Marsh to allegedlymanipulate the placement of accounts in return for contingency feecommissions, he said.

Mr. Gallagher said that the firm has had an auditing process inplace for over a decade to ensure that each office is abiding bythe companys policies of honesty and integrity. The firm has hiredoutside counsel to make an internal review to ensure the firmspolicies have been followed.

When asked during the conference call what the fallout will befor the industry and if Gallagher would benefit from Marshsmisfortunes, Mr. Gallagher said: “It is too early in the game tosee how this all shakes out,” adding that he did not want tocomment on his competitors.

Through Sept. 30, Gallagher said it collected $31.7 million incontingency fees, accounting for less than 3 percent of revenues.It said $5.1 million of those fees were in non-retail business,managing general agency and program administration contracts, whichMr. Gallagher said he believes his firm would be able to retain. Hedid not say how the firm would make up the loss in contingency feerevenue.

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