Class action lawsuits in federal courts on both coasts have been initiated on behalf of small businesses in California, New York and New Jersey against American International Group (AIG) over workers’ compensation reporting.
Plaintiff attorneys say the case could involve thousands of firms doing business from the 1970s until the early 2000s and could result in damages up to hundreds of millions of dollars, although no figure has yet been established.
AIG says the suits are an attempt to reopen charges that have already been settled.
The suit filed this week against AIG and its subsidiary companies, and former AIG CEO Maurice Greenberg, charges unfair business practices, fraud and violations of the federal racketeering statutes.
The attorneys who filed the suit allege that beginning in the 1970s AIG engaged in a scheme to misreport the amount of workers’ comp premium it collected in each state, which resulted in insured employers paying more in certain workers’ comp fees.
By making it appear that less money in workers’ comp premium was collected, AIG caused insurance regulators to assess artificially inflated fees on insured employers for certain state mandated workers’ comp programs, the attorneys argue.
AIG in 2010 agreed to pay $146.5 million in fines and additional taxes to state insurance regulators for alleged under-reporting of premiums to states more than a decade ago. AIG has also agreed to pay $450 million to resolve litigation brought by other insurance carriers over the misreporting.
The deal was believed to have resolved a multi-state probe that examined whether AIG violated premium reporting rules governing workers comp insurance from 1985 to 1996. The misreporting had the effect of lowering the premium taxes and premium-based assessments AIG paid, according to regulators.
In a response to this week’s suit AIG referred to that deal.
“The court filings attempt to recycle allegations of wrongdoing from decades past that AIG has already resolved via settlements with its regulators and with civil plaintiffs,” AIG said in a statement issued to Insurance Journal on Thursday. “AIG will defend the cases vigorously.”
However that deal did not give damages to the companies that were paying the higher premiums as a result of AIG’s “scheme,” an attorney on the case said on Thursday.
“The wrong that we’re suing for has not been dealt with at all,” said Drew Pomerance, a partner in Roxborough, Pomerance, Nye & Adreani LLP, the firm representing the class in California. “AIG has not compensated any insured employers affected by this conduct.”
With an air of confidence he added: “There’s been judgment against them before, and we expect to get a judgment against them this time.”
Based on previous litigation and analysis, Pomerance estimates AIG underreported premiums by $2 billion, which could lead to a large figure for any damages that may be sought.
“It looks like there was more than $2 billion of underreporting and probably substantially more over the years,” he said. “It could be tens to hundreds of millions of dollars in damages.”
Experts are looking at the figures involved and actuarial factors, and there is still the task of ascertaining class members, as well as discovery, before it becomes known how much damages attorneys will ask for, Pomerance said.
The first court of appearance in California is a case management conference set for Jan. 17 in the U.S. District Court for the Northern District of California in San Francisco. Similar appearances are expected in New York and New Jersey, according to Pomerance.
The suit outlines complaints including violations of the Racketeer Influenced and Corrupt Organizations Act, common law fraud, negligent misrepresentation, violation of the Unfair Business Practices Act and unjust enrichment.
The suit seeks “restitution, disgorgement, compensatory, punitive, and treble damages, a constructive trust, and injunctive relief arising from Defendants’ long-term, unlawful, and fraudulent underreporting of workers’ compensation (“WC”) insurance premium, evasion of related financial obligations, and abuse of their statutory, regulatory, common law, and fiduciary responsibilities with regard to WC policies issued to businesses that employ workers in the State of California.”
According to the suit, AIG remitted to the state only the amount of the policyholder surcharges the state expected to receive based on the company’s “falsely underreported” workers’ comp premium.
“Defendants wrongfully retained the difference between the higher aggregate amount collected from policyholders and the lower amount remitted to the states,” the suit states.
Under the terms of the 2010 settlement, AIG agreed to:
- Pay a $100 million fine to be apportioned among all the participating states;
- Pay approximately $46.5 million in additional taxes and assessments;
- Enter into a compliance plan containing agreed-upon specific steps and standards for evaluating AIG’s ongoing compliance with workers compensation insurance rating and reporting requirements;
- Submit to periodic internal and state monitoring and a confirmatory examination at the end of 24 months; and
- Agree to pay a contingent potential fine of up to $150 million if AIG fails to meet the terms of the compliance plan.
New York, New Jersey and California have certain surcharges that are direct pass-throughs to employers who buy workers’ comp insurance from carriers in their state. In New York, for example, such surcharges have been used to finance special purpose funds (SPFs), including the administration expenses of the Workers Compensation Board, the Special Disability Fund, the Reopened Cases Fund, and the Workers Compensation Security Fund.
The lawsuits say that to administer SPFs that are financed with pass-throughs to policyholders, regulators in these states first aggregate workers’ comp insurers’ premium data to determine the total amount of workers’ comp insurance written in the state for a given year. Regulators then compare that total to the amount of money needed to fund the SPFs in question, calculating what percentage of the aggregate workers’ comp insurance written in the state this amount equates to. Afterwards, regulators instruct insurers to pass through to policyholders an assessment or surcharge equivalent to that percentage of the policyholder’s premium. This way, each policyholder in the state pays its own pro rata share of funding the SPFs.
“Each of the four SPFs described herein existed during the approximate four decades of underreporting. Each time these agencies levied assessments based on the amount of premium written, the surcharged percentages were improperly and uniformly inflated by Defendants’ underreporting,” the plaintiffs’ attorneys alleged in the complaint filed in the U.S. District Court for the Southern District Of New York.
The New York lawsuit alleges that, “Defendants expected and intended that their fraudulent underreporting would also have the effect of causing the state to miscalculate the percentage surcharges necessary to administer SPFs, and as a direct result, that Plaintiffs and Class Members would pay artificially inflated amounts for the SPFs passed directly through to them.”
Plaintiffs’ attorneys also argue that “artificially inflated” SPF surcharges impacted individual policyholders insured by AIG and other insurers alike.
According to the lawsuits, “Defendants knowingly (and Other Insurers unknowingly) passed along inflated Special Purpose Fund assessments to their policyholders.” These lawsuits further allege that defendants remitted to the state only that amount of the policyholder surcharges that the state expected to receive based on defendants’ “falsely underreported” insurance premium.
“Each policyholder who purchased WC insurance in New York during the years that Defendants underreported the amount of premium that they had collected, was subjected to the higher surcharge that state regulators had calculated as necessary to fill the SPF coffers based on the incorrectly reported, lesser amount of aggregate WC premium volume that the Defendants reported,” according to the New York lawsuit.
Similarly, in New Jersey, policyholder surcharges are used to finance the state’s Second Injury Fund and the Uninsured Employer’s Fund, among other programs. And policyholders were billed for higher percentage surcharges during the years that defendants allegedly underreported premium, according to the the suit filed in the U.S. District Court for the District of New Jersey.