In battle of suits and countersuits over workers’ comp premiums, AIG gets to subpoena more than 400 competitors

AIG, the giant insurer and a major player at the core of the Great Recession, has been allowed by a federal judge to begin issuing subpoenas to 400 of its competitors in the workers compensation insurance business, according to a March 16 piece at businessinsurance.com.

The ruling, which allows AIG to pursue “nonparty discovery,” is part of a larger dispute between AIG and several competitors–but extends to “discovery of practices by insurers not named in the lawsuit, AIG said Monday in a statement.”

Industry leaders involved

The fracas involves some heavyweights in the industry, including some who joined forces in the original RICO suit against AIG: “The ongoing litigation grew out of a May 2007 lawsuit against AIG originally filed by the National Workers Compensation Reinsurance Pool made up of AIG competitors and operated by Boca Raton, Fla.-based NCCI Holdings Inc. That suit alleged violations of the Racketeer Influenced and Corrupt Organizations Act by AIG, among other assertions.”

It also involves some colorful language, for what might seem an otherwise dry topic.

Let’s pick up the story in 2005 when, according to an August 26, 2009 post at an insurance law blog, “a New York state investigation revealed that AIG had, over several decades, provided false reports of its workers’ compensation premiums to NCCI and state tax authorities to evade its residual-market obligations.” Id. Thereafter, in 2006, AIG entered into settlement agreements, including a $1.6 billion settlement with New York and federal authorities. The Participating Companies contested that the settlement agreements offered full and fair restitution. Id. at 5.

“On May 24, 2007, NCCI filed suit against AIG, alleging underreporting of premium data. AIG interposed numerous defenses and asserted counterclaims for an equitable accounting and an action on an open, current, and mutual account, both of which survived NCCI’s motion to dismiss. AIG also filed a 12-count third-party complaint against 24 named companies and numerous unnamed companies. Id. at 3.”

Court dismisses NCCI suit

But in August 2009, a federal district court dismissed the suit against AIG, “holding that the NCCI failed to establish standing to assert claims on behalf of the Pool.”

That’s when AIG came out swinging, inserting itself as plaintiff, and as described at workerscompsc.com, in September 2009 amended that complaint “in its Chicago racketeering conspiracy fight alleging fellow members of the National Workers’ Compensation Reinsurance Pool conspired to suppress a state and federal probe of the systematic underreporting of workers’ compensation premiums.”

AIG’s amendment, according to Michael Whiteley, “names as defendants the pool, NCCI and 19 insurance companies. It focuses on the actions of Liberty Mutual Group, Travelers, The Hartford, Ace INA Holdings and Sentry Insurance Co. as carriers AIG says have dominated the governing board of NWCRP.

“The amended complaint, which was filed under the Racketeer Influenced and Corrupt Organizations Act (RICO), alleges that NCCI flagged significant problems with the misreporting of premiums as early as 1986 and then conspired with pool members to conceal the problem while then-New York State Attorney General Eliot Spitzer was investigating the practice at AIG.”

AIG says it was targeted as scapegoat

Furthermore, AIG alleges the whole thing was a longstanding sham-up, designed to hurt AIG.

Again from the Whiteley piece: “And AIG repeated assertions that its competitors – led by Liberty Mutual, which last year overtook AIG as the leading comp insurer in America – conspired to make AIG the scapegoat in the Spitzer probe to prevent investigators from broadening their target.

“AIG said a Liberty Mutual representative on the pool’s governing board said at a board meeting in 2005 that the Spitzer probe gave the board ‘an opportunity to get the bastards at AIG.’ “

The residual market

What’s at stake is who-owes-what to cover costs in the so-called “residual market,” the pool for employers who can’t workers’ comp coverage in the primary market. As the insurance law blog explains:

“The action concerned the workers’ compensation insurance market. Employers obtain workers’ compensation insurance coverage from insurers in what is known as the “voluntary market.” Insurers that provide coverage to the voluntary market are required by state law to provide coverage to the “residual market,” which is the market for employers who cannot obtain coverage on the voluntary market. Those employers obtain workers’ compensation insurance coverage through an individual state’s assigned risk plan. Under that plan, the amount of insurance an insurer is required to provide for the residual market is directly proportional to the amount of premiums it collects for the policy it writes for the voluntary market. Mem Op. 3″

“Therefore, ‘any company that underreports its premiums to NCCI decreases its reinsurance participation rate and the overall total used to calculate all the rates.’ Id.”

‘Common practice in the insudtry’

Looking through the various accounts of the lawsuits and countersuits, it’s hard to find any instances in which AIG denies under-reporting these premiums. After all, it did settle for at least $1.6 billion in 2006. So far, it seems like AIG is merely saying, well, everybody did it.

From the businessinsurance.com conclusion, re AIG’s most recent action: “Now AIG is seeking proof through its subpoenas that premium underreporting practices it is alleged to have engaged in were common practice in the industry.”

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