The dark side of insurance.

WHAT did they know and when did they know it?

As word of the unfolding insurance industry scandal keeps filtering out, it's a question worth pondering. How were the employees of Marsh & McLennan Cos., the world's largest insurance brokerage, rationalizing the bid-rigging operation that they are alleged to have carried out?

If you believe the complaint filed by New York Attorney General Eliot Spitzer--and you don't hear many denials in the insurance industry--this wasn't just a rogue employee or two looking to pocket a few extra bucks. Nor did it involve some arcane accounting maneuver known only to a few senior managers. What went on at Marsh, at least according to Spitzer's lawsuit, was systemic corruption carried out in offices all over the country.

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

As a property and casualty broker, Marsh is supposed to solicit bids from insurers and then, acting as a trusted agent, work with clients to select the best of the lot. Instead, Marsh is said to have asked certain insurers to solicit artificially high bids so that preferred carriers would appear to have the cheapest rates. In L.A., according to the suit, Marsh would ask Hartford Insurance "on virtually a daily basis" for inflated quotes. Hartford presumably went along out of fear that Marsh would freeze them out of other business.

Marsh, in other words, apparently strong-armed the industry. In return, insurers would provide them with so-called contingent commissions--bonuses based on the volume or profitability of business that the brokerage steers their way. In other words, kickbacks.

For years, nobody said a word--or if they did, nobody listened.

And you could understand why. It's a good bet that most of the players are in denial that what they did was so bad--certainly nothing like bid-rigging and kickbacks that might go on in the seedier sections of town, or parts of New Jersey, but not in the button-down properly and casualty business.

For those willing to concede that the practice was at the least unethical (illegal in many states) there must have been other rationalizations. Insurance brokers don't cure cancer, after all--they just arrange policies for businesses. For companies charged annual premiums of $1 million, what difference would a few grand make, up or down? Would anyone notice?

Besides, even if providing false quotes, soliciting rigged bids and making payoff arrangements ran afoul of someone's moral compass, what were they supposed to do about it? Complain to a superior and risk being let go? Inside those Figueroa Street offices are working people little different than the rest of us. They have families to support and mortgages to pay off. With the economy the way it is, a good-paying white collar job is no sure thing. Rock the boat? Are you kidding?

And before any of us gets high and mighty about what the insiders should have done, what would we have done under the same circumstances? Quit? Call a newspaper reporter? Call Spitzer's office'? Moral righteousness sounds awfully noble, but in the business world, it can be lonely, hazardous duty, and let's face it, most folks are temped to just look down and pretend it's not there.

Trouble is, what happens when Eliot Spitzer isn't around to make things fight?

Mark Lacter is editor of the Business Journal.