The opinion of the court was delivered by: Hochberg, District Judge
In this Multidistrict Litigation, 38 cases brought throughout the country have been assigned to this Court for all pretrial proceedings. The Plaintiffs claim a vast conspiracy between insurance brokers and carriers to rig bids and to allocate or "steer" customers to defeat competition in the insurance market in exchange for high brokerage commissions. This matter comes before the Court upon Defendants' Motion to Dismiss the First Consolidated Commercial Class Action Amended Complaint (the "Commercial Complaint") and the First Consolidated Employee Benefits Class Action Amended Complaint (the "Employee-Benefits Complaint") (together, "the Complaints") pursuant to Fed. R. Civ. P. 12(b)(6). The Court has considered the written submissions of the parties, and heard oral arguments on July 26, 2006.*fn1
The plaintiffs in the Commercial Case are businesses, individuals, and public entities who, between August 26, 1994 and the date of the class certification (the "Class Period"), have engaged the services of the Broker Defendants to obtain advice with respect to the procurement or renewal of commercial property and casualty insurance, and entered into or renewed a contract of insurance with one of the Insurer Defendants.
The plaintiffs in the Employee-Benefits Case purport to represent two distinct classes: (1) a class of employees (the "Employee-Plaintiffs") who obtained insurance from the Insurer Defendants through their employers' benefits plans, and purchased from them certain supplemental insurance coverages; and (2) a class of employers (the "Employers-Plaintiffs"), who, with the assistance of the Broker Defendants, contracted with the Insurer Defendants to provide group insurance coverage to their employees as part of their employee benefits plans.
The Complaints name two groups of defendants: a group of insurance brokers (the "Broker Defendants"), and a group of insurance carriers (the "Insurer Defendants"), described in the Complaints as the "nation's largest insurance brokers ... and insurance companies." Commercial Complaint ("Comm. Compl.") ¶ 1. The Broker Defendants, together with their affiliates, provide their clients with risk management and insurance brokerage services, including, inter alia, "analysis of risk and insurance options, procurement and renewal of insurance, interpretation of insurance policies, monitoring the insurance industry on the client's behalf, keeping clients informed as to developments in the insurance marketplace, and assisting clients with the filing and processing of claims against the policies they place." Id. at ¶ 178. The Insurer Defendants and their subsidiaries develop, market and sell a variety of insurance and reinsurance products for individuals and business clients, in the United States and abroad.
On October 14, 2004, New York State Attorney General Eliot Spitzer ("NYAG") filed a civil complaint in New York State Supreme Court against Marsh & McLennan ("Marsh"), one of the Defendants in this action, alleging, among other things, that Marsh had solicited rigged bids for insurance contracts, and had received improper contingent commission payments in exchange for steering its clients to a select group of insurers. See People of the State of New York v. Marsh & McLennan Cos., Inc., No. 04/403342 (N.Y. Sup. Ct., Oct. 14, 2004). The NYAG Complaint was followed by other governmental and regulatory investigations throughout the country, and prompted the filing of several federal actions based on allegations similar to those raised in the complaint against Marsh. See Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al., C.A. No. 1:04-6954 (S.D.N.Y. 2004); QLM Associates, Inc. v. Marsh & McLennan Companies, Inc., et al., C.A. No. 2:04-5184 (D.N.J. 2004); Accent On Eyes Corp. v. Marsh & McLennan Companies, Inc., et al., C.A. No. 2:04-4535 (E.D.N.Y. 2004); Eagle Creek, Inc. v. ACE INA Holdings, et al., C.A. No. 2:04-5255 (E.D. Pa. 2004).
On February 17, 2005, the Judicial Panel on Multidistrict Litigation transferred these cases to this Court for coordinated or consolidated pretrial proceedings pursuant to the multidistrict litigation ("MDL") procedures set forth in 28 U.S.C. § 1407.See In re Insurance Brokerage Antitrust Litig., 360 F. Supp. 2d 1371 (J.P.M.L. 2005) (establishing MDL No. 1663). Since that time, additional "tag-along" actions have been conditionally transferred to this MDL.
By Order dated May 25, 2005, this Court directed Plaintiffs to sever their claims involving commercial property and casualty insurance from their claims involving insurance sold as part of an employee benefits plan, and on August 8, 2005, the Court consolidated the transferred actions into two consolidated dockets, In re Insurance Brokerage Antitrust Litigation (Civil No. 04-5184) (the "Commercial Case") and In re Employee-Benefit Insurance Brokerage Antitrust Litigation (Civil No. 05-1079) (the "Employee-Benefits Case"). See Orders No. 3 and 6. Plaintiffs filed two Consolidated Amended Complaints on August 1, 2005, followed by a 153-page Corrected Employee-Benefits Complaint on August 15, 2005, and a 173-page Corrected Commercial Complaint on August 29, 2005.*fn2
C. Factual Allegations*fn3
The thrust of Plaintiffs' Complaints is that Defendants have perpetrated a "massive scheme to manipulate the market for commercial insurance," and have conspired to "fraudulently market and sell insurance products and related services to and/or through employee benefits plans." Comm. Compl. ¶ 1; Employee-Benefits Complaint ("EB Compl.") ¶ 1. Plaintiffs allege that "the Broker Defendants and Insurer Defendants engaged in a combination and conspiracy to suppress and eliminate competition in the sale of insurance by coordinating and rigging bids for insurance policies, allocating insurance markets and customers and raising, or maintaining or stabilizing premium prices above competitive levels." Comm. Compl. ¶ 1. Through such practices, according to the Complaints, the Brokers and the Insurers "have created the illusion of a competitive market for insurance" while "the selection, pricing, and placement of the insurance products at issue in this litigation were, in fact, the result of Defendants' collusion." Id. at ¶ 2.
Plaintiffs claim that as a result of the conspiracy, "the prices paid by plaintiffs and class members were raised and maintained at artificially high, supra-competitive levels" and that Plaintiffs "were deprived of the benefits of free and open competition in the purchase of insurance." Id. at ¶ 532. Plaintiffs allege that the Broker Defendants profited from the conspiracy through the receipt of "exorbitant contingent commissions" and "other undisclosed kickbacks," and that the Insurer Defendants have improperly increased their profits and revenues by raising and maintaining the premiums charged to Plaintiffs, without having to compete for insurance business.
The Complaints rest on the general theory that Defendants' conduct has created "an overwhelming conflict of interest and breach of duties" and has undermined the nature of the broker-client and the insurer-insured relationships. Plaintiffs allege that, despite the Brokers' representations "that they will provide unbiased brokering advice and assistance to their clients in the selection of insurance products," the Brokers allegedly conspired with the Insurer Defendants to steer their clients to purchase or renew coverage with the Insurers at inflated prices and/or reduced coverage and benefits, "at the expense of their clients' best interests and in contravention of their fiduciary obligations." Id. at ¶ 181. Plaintiffs allege that the Brokers and the Insurer Defendants have misled their clients into thinking that they are receiving the most economical and appropriate insurance products, while in fact, the Brokers are steering them towards products that will maximize the profit of the Defendants.
Plaintiffs contend that the Defendants implemented the conspiracy through two main schemes: (1) the kickback and steering scheme and (2) the bid-rigging scheme.
1. The Kickback and Steering Scheme
The Complaints allege that the Broker Defendants have received undisclosed kickbacks from the Insurers in the form of contingent commissions (also known as "overrides"), and in return, have agreed to steer their clients to purchase insurance from certain "preferred" Insurers with whom the Brokers had the most profitable arrangements. As the Complaints explain, the payment and amount of contingent commissions are based on factors such as: (i) the volume of insurance that the Brokers place with a particular Insurer ("volume contingency"); (ii) the renewal of that business ("persistency contingency");and (iii) the profitability of that business ("claims loss ratios contingency"). Id. at ¶ 202. Contingent commissions are often memorialized in written agreements between brokers and insurers referred to as "placement service agreements" ("PSAs"), "override agreements," or "market service agreements." The Complaints describe several examples of contingent commission agreements. Id. at ¶ 224-231.
Plaintiffs claim that the Defendants have fraudulently misrepresented and failed to adequately disclose these contingent commission agreements. In particular, Plaintiffs allege that the Defendants have failed to disclose (a) the existence, source, and amount of the contingent commissions; (b) the material impact of contingent commissions on Defendants' profitability; (c) that Plaintiffs ultimately pay the cost of these undisclosed fees through higher premiums; and (d) that contingent commissions have created economic incentives for the Defendants to act contrary to their contractual and fiduciary duties to the Plaintiffs. While Plaintiffs acknowledge that some of the Defendants have begun to take steps to disclose the payment and receipt of contingent commissions, they assert that many Defendants continue to make inadequate disclosures of their contingent commission agreements.
Plaintiffs allege that the Broker Defendants improperly steer their clients to certain preferred insurers to maximize contingent commission revenues. In support of their allegations, Plaintiffs point to several statements allegedly made by some broker executives. See, e.g., Comm. Compl. ¶ 240 (alleging that a former managing director with Marsh stated that "some [contingent commission agreements] are better than others ... I will give you clear direction on who [we] are steering business to and who we are steering business from."); Id. at ¶ 259 (alleging that a former Aon executive stated: "With our override agreements with Chubb and Fire Fund, we need to direct all new business exclusively to them for the next month and beyond."); Id. at ¶ 271 (alleging that a Chief Marketing Officer at Willis wrote in an email: "Don't forget the advantages of placing as much business as possible with the carriers we have negotiated special deals with, as you look for ways to maximize revenues the last few months of this year and into 2000."); Id. at ¶ 268 (alleging that a managing Director of Willis stated: "Special attention is being given to St. Paul, Chubb, Liberty Mutual, Hartford and Crum & Forster due to special [PSA] agreements."); Id. at ¶ 281 (stating that "a Gallagher executive instructed his managers to 'pump additional premium volume' to those carriers with whom it had contingent commissions agreements."); Id. at ¶ 294 (alleging that "USI employees were told, at monthly department meetings, to 'stick with the higher commission carriers.'").
The Complaints further allege that the Brokers provided "financial incentives" to employees who maximized contingent commission revenues by steering clients to the preferred insurers, and "reprimanded" their employees for failing to steer business to those insurers. See, e.g., id. at ¶ 246 (alleging that one Marsh employee was elevated to vice president in part because he had been able to renew a client's business by "moving" that client to an insurer with which Marsh had a PSA). Plaintiffs also claim that some Insurers agreed to pay the salaries of certain Brokers' employees, as well as "hiring subsidies," in exchange for the Brokers' promise to steer new business to the Insurers. See, e.g., id. at ¶ 287 (alleging that Chubb, an insurance company, agreed to pay a hiring subsidy to a broker, Gallagher, and that an internal document stated that "in return for Chubb's contribution to individuals salary, [Gallagher's unit] was required to meet specific new business goals with Chubb.")
The Complaints assert that those insurers who refused to pay contingent commissions were "left out of the game." See, e.g., id. at ¶ 249 (alleging that in 2003, Aon steered business away from Hartford in retaliation for Hartford's decision to use a different broker for its own directors and officers policies; Aon allegedly decided to examine all placements with Hartford and recommended that Aon keep clients with Hartford on the lines that paid contingent commissions); Id. at ¶ 245 (describing a report from Marsh's Los Angeles office which directed the brokers to temporarily stop selling personal coverage lines from AIG because Marsh did not want to exceed an annual cap on policies with AIG in states with a high risk of earthquakes and hurricanes, since exceeding the limit could reduce contingent commissions to Marsh).
In addition to contingent commissions, Plaintiffs claim that the Brokers obtained undisclosed compensation from the Insurers through "unlawful tying arrangements" under which the Brokers steered primary insurance contracts to the Insurers on the condition that those Insurers use the Brokers' reinsurance subsidiaries for their reinsurance business. Plaintiffs allege that such arrangements allowed the Brokers "to reap additional improper revenue," and "had the effect of increasing the price of reinsurance," with the increased costs being passed on to the policyholders. See, e.g., id. at ¶ 359 (quoting a letter from a Gallagher executive, in which he stated that he would "try and leverage the specific companies [AIG, Chubb and Hartford] for more of their reinsurance business."); Id. at ¶ 363-67 (alleging that Aon promised to steer business to AIG, Liberty Mutual Group, and Chubb in return for their commitment to use Aon's reinsurance services); Id. at ¶ 368-71 (describing Aon's alleged practice of entering into "clawback" agreements, under which Aon's reinsurance subsidiary would discount its reinsurance brokerage commissions, and in return, would steer retail insurance business to certain insurers).
Finally, Plaintiffs contend that the Brokers received additional income (known as "wholesale payments") by placing their clients' business with insurers through related wholesale entities "purport[ing] to act as intermediaries between the Broker Defendants and the Insurer Defendants." Id. at ¶ 348. According to the Plaintiffs, wholesale payments create the same incentives as contingent commissions, and are part of the same scheme and conspiracy under which the Brokers mislead their clients into believing that they provide independent brokerage advice. These allegations of the Complaint only focus on one Broker Defendant, Willis. Id. at ¶ 349-53 (claiming that Willis placed its clients' business through its wholesaler, Stewart Smith, to generate additional commissions, and that between 2002 and 2004, Stewart Smith paid Willis over $62 million for brokering business originated by Willis through Stewart Smith.).
2. The Bid-Rigging Scheme
The Complaints allege that "the Defendants colluded in a bid-rigging scheme to allocate customers and to deceive Plaintiffs into believing that the Broker Defendants were obtaining competitive insurance bids from the Insurers on behalf of their clients." Comm. Compl. ¶ 307. The bid-rigging allegations fall into two categories: (a) allegations against the Brokers; (b) allegations against the Insurers.*fn4
a. Allegations Against the Brokers
Plaintiff claim that the bid-rigging was "facilitated by the Broker Defendants, who solicited and obtained fictitious high quotes from the Insurer Defendants to guarantee that certain preferred insurers would win the bidding competition, and by determining the terms of the winning and losing bid." According to the Complaints, the Brokers arranged for fictitious quotes (referred to as "A quotes," "B quotes," and "C quotes") to be submitted to the client. "A quotes" refers to the quotes solicited by a broker when the broker had an incumbent carrier for one of its clients whose insurance policy was up for renewal; if the insurer agreed to make a quote at the targeted premium and policy terms demanded by the broker, the insurer was guaranteed the policy renewal. "B quotes" (also known as"backup quote" or "accommodation quote") refers to "phony" quotes solicited from non-incumbent insurers with the understanding that these insurers would not submit a competitive bid; "B quotes" were used to ensure that the incumbent carrier would get its policy renewed, and the "B quote" insurers allegedly knew that "their turn would come later." "C quotes" refers to the quote solicited from insurers when there was no insurance carrier "to protect."
In support of their bid-rigging allegations against the Brokers, Plaintiffs rely extensively on the guilty pleas of several executives from Marsh and other insurance and brokerage companies who acknowledged that they had submitted false quotes and participated in a bid-rigging scheme. Id. at ¶ 311 (citing the guilty pleaof an AIG executive, John Mohs, which states, in relevant part: "Marsh and AIG personnel periodically instructed Mohs to submit specific quotes for insurance rates that Mohs believed: (a) were higher than those of incumbent carriers; (b) were designed to ensure that the incumbent carriers would win certain business; and (c) resulted in clients being tricked and deceived by this deceptive biding process."). Plaintiffs also explain how Aon allegedly used Zurich and other insurers to inflate bids, and assert that Aon ordered its brokers on several occasions to contact Insurer Defendants AIG, CNA and Zurich to inform them of a competitor's bid. Id. at ¶ 337-42. They further describe: (a) HRH's alleged practice of providing a "last look" to the incumbent insurance company; Id. at ¶ ...