AIG Accused of Workers' Compensation Fraud
SAN FRANCISCO (CN) - American International Group for nearly 40 years has been underreporting workers' compensation premiums, causing insured employers to pay improperly inflated state insurance surcharges, three federal classes claim.
The coordinated suits were filed this week in San Francisco, Manhattan and Newark against AIG and its subsidiaries and affiliates. AIG is accused of unfair business practices, fraud, unjust enrichment and violations of federal anti-racketeering law.
The California complaint, filed by Franjo Inc. and DMS Facility Services Inc., says it all began in the 1970s when AIG "devised, implemented, participated in, and carried out nationwide schemes - later characterized by AIG's own general counsel as 'permeated with illegality' - to miscategorize, falsely report, and falsely book the AIG companies' [workers' compensation] premium as other premium (for example, as 'general liability' premium), in order to reduce defendants' expenses, inflate their profits, and unjustly enrich themselves at the expense of plaintiffs and the class." (Parentheses in original.)
AIG allegedly falsified certified annual financial reports that underreported workers' compensation (WC) figures to evade its equitable shares of financial responsibility for state-levied taxes and assessments. It caused state insurance regulators, through no fault of their own, to assess artificially inflated fees on insured employers, according to the complaint.
"When defendants underreported premium, policyholders throughout the state paid artificially inflated pass-through surcharges and assessments," the policyholders now say. "This was equally true of individual policyholders insured by defendants and those insured by other insurers alike - each policyholder who purchased WC insurance in California during the years that defendants underreported the amount of premium that they had collected were subjected to the higher surcharge, calculated by state regulators as the amount necessary to fill the [special purchase funds] coffers based on the incorrectly reported, lesser amount of aggregate WC premium volume that the defendants reported."
AIG and its affiliates concealed the fraud from state regulators by keeping more than one set of books and records tracking the amount of workers' compensation premiums they collected from their policyholders, according to the complaint.
In addition to an accurate set of books and records, they also "maintained a false set of books and records that tracked the inaccurate, lesser amount of WC premium that they reported to California state regulators, as well as the lesser amount of aggregate [special purchase funds] surcharges, which they had collected from their policyholder, that they then remitted to state regulators," the complaint states. "Only the false set of books and records were made available to state auditors."
AIG then retained the difference between the higher aggregate amount it collected from its policyholders and the lower amount it remitted to the states, the policyholders say.
For example, if AIG claimed to have collected $75 million of workers' compensation premium when it actually collected $100 million, and state regulators levied a surcharge of 1.3 percent based on the inaccurate amount, AIG would then pass the inflated percentage on to policyholders and receive $1.3 million. AIG would then pay the state only $975,000 and keep the remaining $325,000, the policyholders say.
"In this manner, the fraudulent underreporting of WC insurance premium allowed defendants to not only evade premium taxes they otherwise owed but also to unlawfully profit from the state-mandated surcharges that they levied on their policyholders," according to the complaint.
The policyholders claim that AIG knew its conduct was illegal and made efforts to conceal its actions. In 1991 and 1992, after the scheme had already been in place for 20 years, AIG's then general counsel, E. Michael Joye, allegedly conducted an investigation and issued a formal report detailing the company's unlawful conduct. The report found that AIG's actions involved "major elements of illegality," according to the complaint.
Despite dissemination of the Joye Memorandum to AIG executives, AIG "failed to end the false WC premium reporting, failed to correct the false certified financial statements, failed to disclose their misconduct and its adverse consequences, and failed to make restitution to all those injured by defendants' fraudulent misconduct," the policyholders say.
Around 2005, the Joye Memorandum came to light when federal and New York state authorities launched investigations into AIG's accounting, financial reporting, and insurance brokerage practices. As part of settlements with various authorities, AIG admitted to its false-premium reporting and made payments or placed into escrow $1.64 billion to resolve the investigations, according to the complaint.
In addition, AIG agreed to pay $450 million to resolve litigation brought against it by other insurance companies. Despite these settlements, businesses and other insured employers have not been compensated for AIG's actions that caused them to pay inflated fees and surcharges, the complaint states.
The San Francisco policyholders seek restitution and/or disgorgement of profits, plus punitive damages.
They are represented by Deborah Rosenthal with Simmons Browder Gianaris Angelides & Barnerd.
An AIG spokesman slammed the three lawsuits as an "attempt to recycle allegations of wrongdoing from decades past that AIG has already resolved via settlements with its regulators and with civil plaintiffs."
"AIG will defend the cases vigorously," spokesman Jon Diat added.