New York Attorney General Eliot Spitzer Thursday unveiled a suit against insurance brokerage giant Marsh & McLennan Cos., and two insurance company executives, alleging fraud and anti-competitive practices in the insurance industry.

Spitzer claims that the firm steered unsuspecting clients to insurers with whom it had lucrative payoff agreements, and that it solicited rigged bids for insurance contracts. The civil complaint filed Thursday in State Supreme Court in Manhattan alleges that for years Marsh received special payments from insurance companies that were above and beyond normal sales commissions.

These payments — known as “contingent commissions” — were characterized as compensation for “market services” but were, in fact, rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies. Also, it claims that Marsh, at times, solicited fake bids, which deceived its customers into thinking that true competition had taken place. These allegations have yet to be proven.

Spitzer’s complaint against the company cites internal communications in which executives openly discuss actions that were aimed at maximizing Marsh’s revenue and insurance companies’ revenues — without regard to clients’ interests. According to the complaint, Marsh collected approximately US$800 million in contingent commissions in 2003. Spitzer’s civil complaint seeks an end to the steering and bid rigging, disgorgement of improper payments, restitution and punitive damages.

It says that the immediate victims of the illegal practices were mainly large corporations seeking property and casualty coverage, but also small and mid-size businesses, municipal governments, school districts and some individuals.

In a statement, Marsh says it takes the allegations “very seriously”, and notes that it has been cooperating with the investigation since it began in the spring but have not been made aware of the charges until now. “We are committed to getting all the facts, determining any incidence of improper behavior, and dealing appropriately with any wrongdoing. This is our highest priority,” it says. “Marsh is committed to serving its clients to the highest professional and ethical standards as demonstrated by its long history as the industry’s leader.”

Simultaneously, Spitzer announced that the two insurance company executives have pleaded guilty to criminal charges in connection with the scheme. Other major insurance companies — ACE, AIG, The Hartford and Munich American Risk Partners — are named in the complaint as participants in steering and bid rigging. Other insurance companies are still under investigation, Spitzer’s office said. The two executives pleaded guilty to participating in the illegal conduct and are expected to testify in future cases.

“The insurance industry needs to take a long, hard look at itself,” Spitzer said. “If the practices identified in our suit are as widespread as they appear to be, then the industry’s fundamental business model needs major corrective action and reform.”

“There is simply no responsible argument for a system that rigs bids, stifles competition and cheats customers,” he added.