States Collecting on $146M AIG Workers’ Comp Settlement

State regulators around the county are finally collecting their share of a multimillion dollar settlement reached with American International Group (AIG) in 2010 based on the company’s misreporting of workers’ compensation premiums for the years 1985 to 1996.

In December 2010, AIG agreed to pay state regulators a total of $100 million in fines and another $46.4 million in premium taxes and assessments after a multistate probe begun in 2008 found the insurer hid at least $2.12 billion in workers’ compensation premium by attributing it to other lines of insurance and thereby lowering its assessments and taxes.

“AIG systematically underreported workers’ compensation insurance premium by putting this premium into the general liability or commercial automobile liability categories,” said Florida Insurance Commissioner Kevin McCarty, representing the states as president of the National Association of Insurance Commissioners (NAIC). “The practical effect of this misreporting was to report premium in lines of business with lower residual market obligations or premium tax rates and assessments.”

Florida was one of the lead states conducting the examination along with Delaware, Indiana, Massachusetts, Minnesota, New York, Pennsylvania and Rhode Island. All states and the District of Columbia participated. The probe built on previous examinations by New York’s attorney general in 2006 and officials in Indiana, Minnesota and Rhode Island.

Florida’s share of the settlement will be $5.6 million in fines and penalties with an additional $8.7 million split being split among several state agencies. The agencies included the state’s Division of Workers’ Compensation and the Florida Workers’ Compensation Insurance Fund.

Pennsylvania Insurance Commissioner Michael Consedine said that his state will collect more than $16.8 million including $8.6 million in fines, $4.6 million in premium taxes and assessments, and $3.6 million to the Workers’ Compensation Security Fund.

California is slated to receive $15.6 million in fines and penalties alone; Texas, $12.8 million; Illinois, $3.7 million; Massachusetts, $3.4 million; New Jersey, $3.3 million; and Michigan, $3.2 million.

A federal judge approved the settlement with the states in December 2010. But before the settlement could take effect, AIG had to resolve several other outstanding conditions. One was a $450 million settlement with some of AIG’s competitors over residual market levies that were reached in February. Another one called for AIG to pay out $25 million to several insurance guaranty associations around the country; this settlement took effect May 30.

In February of this year, a federal judge formally approved the $450 million class-action settlement with several of AIG’s rivals hurt by its underreporting. The companies charged AIG’s underreporting of premium forced them to pay higher than required assessments to fund different residual markets around the country. Hartford Financial Services Group, Travelers Indemnity, Technology Insurance, ACE Ina Holdings, Auto-Owners Insurance Co., Companion Property & Casualty Insurance Co., and Firstcomp Insurance Co. were among the companies in that suit.

Liberty Mutual was also a party to that class action but it has expressed disappointment with the $450 million settlement amount and filed an appeal to fight for more. The $450 million is based on the court’s calculation that AIG underreported $2.1 billion in premiums.