Bloomberg Businessweek
June 8, 2010

American International Group Inc. was ordered by a federal judge to turn over records by Sept. 1 to competitors that sued the company and said it was responsible for workers' compensation fraud of $1 billion.

AIG must review 400,000 documents and produce those that aren't confidential, Magistrate Judge Sidney Schenkier said in a June 4 order in the civil fraud case. Liberty Mutual Group Inc. sued AIG last year saying the company underpaid industry-funded pools by hiding revenue used to calculate its obligations. AIG has filed a complaint against rivals, including Liberty Mutual and Travelers Cos., saying underreporting happened industrywide.

"What they're trying to prove is that AIG was systematically misreporting workers' compensation premiums as being other lines and knowingly avoiding proper fees," said Edward Priz, president of Riverside, Illinois-based commercial insurance consulting company Advanced Insurance Management LLC. "AIG is basically saying, to whatever extent we did this, we didn't do anything different from you guys."

The insurers, fighting over who pays for state workers' compensation funds, are seeking information to support their claims and attempting to limit the scope of material they provide. New York-based AIG has already produced more than 287,000 pages, according to the order from Schenkier in U.S. district court in Chicago.

Remains Committed
"AIG remains committed to a full development of the record" in the case, said Mark Herr, a spokesman for the company. "In contrast, certain competitors of AIG continue fighting to avoid the production of their own evidence that would reveal how much they and others may have underreported." He didn't name the rival companies.

The dispute over workers' compensation began in 2007, a year after AIG resolved a suit from then-New York Attorney General Eliot Spitzer, who said the company underreported premiums between 1985 and 1996.

An industry group, the National Workers Compensation Insurance Inc., sued AIG in May 2007, saying the company had underpaid for more than three decades and owed $1 billion. Liberty Mutual filed its complaint last year after U.S. District Judge Robert Gettleman ruled that the council lacked standing to sue on behalf of 600 companies in its reinsurance pool.

Pattern of Racketeering
Liberty Mutual said in its complaint in October that AIG "operated an enterprise through a pattern of racketeering." Managers were rewarded because the premium underreporting helped AIG reach a 20 percent profit growth target, Boston-based Liberty Mutual said.

In most states, companies that sell workers' compensation insurance must fund pools that serve as insurers of last resort to cover worker injuries at employers that pose unattractive risks for individual carriers. They also pay into funds to protect policyholders of insurers that fail.

AIG said in its complaint in September that rivals "formed an illegal conspiracy" to hide underreporting of premiums. The competitors "engaged in the very same or similar underreporting practices that the New York authorities alleged against AIG," the company said.

"Liberty Mutual looks forward to resolving this matter in court," said Adrianne Kaufmann, spokeswoman for the company.

The case is National Council on Compensation Insurance Inc. v American International Group Inc., et al. 1:07-cv-02898, U.S. District Court, Northern District of Illinois (Chicago).