The Chubb Corporation has reached a settlement with the state of Massachusetts resolving allegations that Chubb's compensation practices offered improper incentives and enabled Boston-based insurance brokerage firm William Gallagher Associates Insurance Brokers, Inc. to direct business to Chubb.

As part of the settlement, Chubb will pay $182,815 to WGA customers and $56,196 to the Commonwealth.

"We are pleased that Chubb cooperated during our investigation of WGA and that it has agreed to pay restitution to customers affected by WGA's alleged abuse of these incentives," said Massachusetts Attorney General Martha Coakley.

The Attorney General's Office filed a lawsuit against WGA on December 19, 2007, in Suffolk Superior Court, alleging that WGA defrauded its customers by charging undisclosed fees and deceiving customers concerning its compensation practices.

According to the complaint, Chubb loaned WGA in excess of $3 million, but offered to forgive this loan and any accrued interest if WGA directed enough profitable business to Chubb. Chubb also invited WGA to invest in a Chubb-sponsored reinsurance company through which WGA insured a portion of numerous insurance policies belonging to WGA's clients.

Reinsurance is insurance that companies like Chubb purchase to protect themselves against their policyholders' claims. According to the complaint, WGA's participation in Chubb's reinsurance program turned WGA into a reinsurer with a financial interest in keeping its customers' highly profitable insurance policies with Chubb.

Chubb also provided WGA with a "trust fund" that WGA could utilize to lower Chubb's quoted premiums. Chubb allegedly maintained the trust fund so that WGA could draw against it to offer Chubb's insurance policies at lower prices in situations in which Chubbs premium quotes were higher than the quotes issued by other insurers. The Attorney General's Office said it believes that WGA utilized this trust fund to distort competitive bidding processes.

This isn't the first time WGA has been involved in a settlement with the Massachusetts Attorney Generals Office. In December 2007 the company returned $3,017,003 to its customers, paid $925,000 to the Commonwealth, adopted conduct reforms and submitted to a binding audit. As a result of the audit, which was completed in November, 2008, WGA proffered an additional $330,624 in restitution to customers and paid $80,000 to the Commonwealth.