Marsh Seeks To Put Limit On Its Own Liability; Asks Clients

NEW YORK—Marsh Inc. last week began asking clients to sign off on new client service agreements that include a $10 million cap on the New York-based broker's professional liability.

The move brings Marsh in line with other professional service firms, such as accountants, investment bankers and actuaries and is about prudent risk management, not any widespread problem at the brokerage, executives there said.

The cap will not affect most clients bringing errors and omissions claims against Marsh, they noted. However, it will protect the firm from low-frequency, high-severity claims that could negatively impact the bottom line of the firm, which largely self-insures those risks, the executives said.

Claims of willful misconduct and gross negligence are excluded from the cap.

The provision is a global directive of parent company Marsh & McLennan Cos. Inc. and will be implemented across all of its business units, starting with Marsh's middle-market and large-account business in the United States, executives said. Several units, including Marsh's small-account business, its risk consulting unit and MMC consulting unit Mercer L.L.C., already put such provisions into client contracts.

"It all boils down, to me, to risk management," said Brian Duperreault, president and chief executive officer of MMC, in an interview last week. "We need to improve our own risk management. We're good at advising others, and I wanted to make sure we were good at practicing it ourselves."

"We do stand behind our business, but we are not the insurer of last resort," he said.

Indeed, Marsh CEO Daniel S. Glaser noted there have been a couple of suits against the firm seeking more than 1,000 times the amount of money Marsh received in compensation.

"This is an acknowledgement where we have to say the role we play is as an adviser and as an intermediary; we're not the risk taker," Mr. Glaser said. "How can Marsh as a broker and risk advisory organization…be willing to accept unlimited liability for very limited and finite amounts of remuneration?"

While Mr. Glaser did not mention any specific cases against Marsh or one of MMC's other units, the cap likely would have limited the recovery efforts of the state of Alaska, which sued Mercer in December 2007 seeking to recover more than $1.8 billion in pension losses the state alleges were due to Mercer's misconduct as an actuary for its Public Employees Retirement System and Teachers Retirement System pension plans.

Mercer says the state is attempting to hold it accountable for economic trends it has no control over.

The suit still is pending, an MMC spokeswoman said.

Messrs. Glaser and Duperreault said clients who were made aware of the cap last week understood the rationale but wanted to discuss it.

"Clients want a healthy and long-living MMC. They want us around," Mr. Duperreault said. "Setting a limit that basically satisfies the vast majority of issues and protects the company, that's good for clients."

Whether Marsh will ultimately walk away from clients that refuse to sign the contract remains to be seen. Mr. Glaser said there already has been one instance where Marsh was invited to tender on a piece of new business that it would not have tendered without the liability limit.

"We are committed to implement something," he said.

"It's something I'd have to noodle through," said Marsh client Carol Arendall, senior director of risk management for OfficeMax Inc. in Naperville, Ill. "I understand capping your exposure, but $10 million doesn't seem like that high of a number."

"It will be interesting to see how their client base reacts when it comes time to renew their contracts," she said. "It could be one of those things that just isn't going to fly. And you may have another broker coming in saying `We don't cap that. We're willing to stand behind our brokers'...or they may find that 90% of their clients don't even care."

John Phelps, director of risk management for Blue Cross & Blue Shield of Florida Inc. in Jacksonville, said he has yet to discuss the new caps with his Marsh broker but said he would approach it as he would any other vendor contract. "I'd assess the services they provide, the opportunities for errors, quality of services provided and risks to our company and decide if this is acceptable," he said.

While such provisions may be new to the insurance industry, they appear to be gaining some traction.

The London-based British Insurance Brokers' Assn. said earlier this month that it was studying the pros and cons of such liability caps.

"Many professions in the U.K. cap their liabilities with their clients…however, insurance intermediaries rarely do and we want to know if that's something they could do…and what are the pitfalls," said Graeme Trudgill, technical and corporate affairs executive for BIBA. He noted that he's aware of "some" larger brokers operating in the United Kingdom imposing such caps, but declined to name them.

"Many of our clients in the financial services business have limits of liability provisions in their contracts and I suspect many of the insurance brokers' clients do, too," said Mitchell J. Auslander, an attorney with Willkie Farr & Gallagher L.L.P. in New York, who advised Marsh on its new provision. "It is a prudent step in risk management. I would question the advice of any risk management adviser who did not manage its own risks properly."

Other observers are more skeptical.

"It's a prudent risk management technique, but the marketplace will ultimately decide whether it's a good idea or not," said Timothy J. Cunningham, a principal with OPTIS Partners L.L.C. in Chicago.

"I think the competition will attempt to use this to their advantage," he said.

BIBA's Mr. Trudgill agreed. "Obviously if a broker did it, it would perhaps put it at a competitive disadvantage to another broker that isn't restricting it," he said.

Representatives of Marsh rivals Aon Corp. and Willis Group Holdings Ltd. were unavailable for comment.