Liberty Mutual Opposes Proposed $450 Million AIG Workers' Comp Class Action Settlement

By Meg Green
A.M. Best Co.
April 29, 2011

Liberty Mutual Group subsidiaries Ohio Casualty and Safeco are opposing a proposed $450 million settlement in a federal class-action lawsuit that accuses rival American International Group of underreporting workers' compensation premiums for years.

Earlier this year, seven other workers' compensation companies -- Ace Ina Holdings Inc., Auto-Owners Insurance Co., Companion Property & Casualty Insurance Co., Firstcomp Insurance Co., Hartford Financial Services Group Inc., Technology Insurance Co. and Travelers Indemnity Co. — were allowed to intervene in the case and sought to resolve it by agreeing to the $450 million settlement (BestWire, Jan. 14, 2011).

"The 'settlement' proposed by seven intervenors ... is in AIG’s self-interest and the interest of several intervenors, but it is detrimental to the class of over 500 insurance companies victimized by AIG’s admitted wrongdoing," Liberty Mutual said in a statement.

AIG has been the center of the federal lawsuit that pits the insurer against several of its workers' comp rivals to answer allegations that it lowballed its workers' comp premiums to dodge premium taxes and substantial residual market charges. In some states, from the mid-1980s to the mid-1990s, there were years when the residual market losses were greater than the residual market premium and voluntary market premium combined. This meant the more voluntary premium a company wrote, the more it had to pay out to cover its share of the residual market losses.

The proposed settlement is based on the assumption that AIG underreported its workers' comp premiums before 1996 by $2.1 billion, the same amount that state regulators used to calculate a settlement late last year.

In the settlement with state regulators, AIG agreed to pay $100 million in fines, plus $46.5 million in taxes and assessments, to insurance regulators in all 50 states and the District of Columbia for under-reporting its workers' comp premiums before 1996 (BestWire, Dec. 23, 2010).

Liberty Mutual argues AIG's underreporting is $6.1 billion, nearly three times the amount the regulators' settlement is based on, according to court papers.

"The proposed settlement a byproduct of an improper 'reverse auction' in which AIG asserted its leverage over other defendants eager to negotiate a deal that is favorable to AIG and those conflicted parties, but grossly unfair to the remainder of the class," Liberty Mutual said in its court papers.

AIG disagreed.

"The settlement before the court is fair and reasonable, and Liberty's opposition is the latest in a long line of desperate attempts to derail a settlement supported by the 50 state insurance departments and the other insurance companies in the litigation," Mark Herr, AIG spokesman, said in an email. "We are confident that the settlement will be approved despite Liberty's repeated efforts to prevent the parties from reaching a resolution. Liberty has made this claim to regulators, experts and other insurance companies and been rejected by them all."

Judge Robert W. Gettleman of the U.S. District Court for the Northern District of Illinois agreed to allow the interveners into the case on Jan. 13, and suspended further discovery in the case (BestWire, Jan. 14, 2011).

Claims of underreporting workers' comp claims have been haunting AIG for years.

The state regulators' examination, which lasted just under three years, followed yet another related settlement agreement between AIG and New York State, under which AIG agreed to pay a total of $1.64 billion to resolve investigations into its workers' comp premium taxes (BestWire, Feb. 9, 2006).

AIG's legal battle with other insurance companies began in 2007, when the National Workers' Compensation Reinsurance Pool, consisting of a group of insurance companies that participate in the residual workers' comp market, filed a suit claiming that AIG purposely under-reported workers' comp premium in an effort to avoid the economic hardships associated with the allocation of workers' compensation residual market losses.

The suit was filed — on behalf of the pool members — by the National Council on Compensation Insurance, which contractually apportions residual market results among member companies on the basis of voluntary workers' comp market share as determined by reported premium.

AIG countered in a 2008 lawsuit that other companies had under-reported their premium to NCCI, some going as far back as 1986 when the NCCI discussed such conduct in a summary report to pool members (BestWire, March 26, 2008). These claims were originally asserted against about 20 carriers, including Liberty Mutual, Travelers, Hartford, Ace and Chubb.

The original lawsuit brought against AIG (NYSE: AIG) by the NCCI was dismissed in 2009 when a judge found the NCCI and the pool lacked the legal standing to sue on behalf of the hundreds of companies that participate in the pool. However, the possibility of a class-action lawsuit for pool members was left open (BestWire, Aug. 21, 2009).

AIG's countersuit was allowed to stand, and Liberty Mutual's subsidiaries sought class-action status to continue the case.

Auto-Owners Insurance Group currently has a Best's Financial Strength Rating of A++ (Superior). Ace INA Insurance and Travelers Group currently have Best's Financial Strength Ratings of A+ (Superior). Liberty Mutual Insurance Cos., Hartford Insurance Pool, Companion Property and Casualty Group, Technology Insurance Co. and members of AIG currently have a Best's Financial Strength Rating of A (Excellent). Firstcomp Insurance Co. currently has a Best's Financial Strength Rating of B++ (Good).

Shares of AIG stock closed at $31.62 in trading on the morning of April 29, down .57% from the previous close.

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