No 1 global insurer Marsh may lose millions of dollars in fines and many more millions in lost market capitalisation after New York Attorney-General Eliot Spitzer launched a lawsuit against it.

The broker is accused of charging insurers contingent commissions for placing business with them and soliciting fictitious bids to deceive clients into believing that competition quotes had been obtained.

Several insurers which allegedly benefitted from the practice have also been named in the lawsuit. They include the world’s largest insurer, AIG, and Ace. The CEO of AIG is the legendary Maurice Greenberg, aged 79. His sons are the CEOs of Marsh and Ace. Two senior AIG managers have already pleaded guilty to fraud.

The Hartford and Munich American Risk Partners have also been named as participants in the alleged scam.

The share value of Marsh shares dropped up to 20% after the charges were made public.

Mr Spitzer alleges Marsh has had a business plan for about five years under which insurers have paid the broker more than $US1 billion dollars in contingent commissions.

“The losers in all this, of course, are Marsh's clients and the marketplace for insurance, which Marsh has corrupted by distorting and elevating the price of insurance for every policyholder," Mr Spitzer said.

“Other victims here are Marsh’s own shareholders, who have never been told that hundreds of millions of dollars of Marsh’s profits derive from illegal activities."

Marsh has responded that it will co-operate with Mr Spitzer. “We are committed to getting all the facts, determining any incidence of improper behaviour and dealing appropriately with any wrongdoing.”

Mr Spitzer told a media conference in New York that the insurance industry “needs to take a long hard look at itself. 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.”