Withdrawn Objections Won’t Tank AIG Deal

     CHICAGO (CN) – A $450 million settlement agreement against AIG can stand, the 7th Circuit ruled, noting that three named plaintiffs voluntarily ceded their objections.
     American International Group is a multinational insurance corporation and the 29th largest public company in the world. In a massive class action, AIG’s competitors claimed that the company had fraudulently underreported workers’ compensation premiums.
     All states require employers to provide workers’ compensation insurance for their employees. Though most companies can purchase the insurance on the “voluntary market,” some companies whose workers are more likely to be injured must seek coverage on the “residual market.”
     Insurers are required to provide residual insurance in proportion to their sales on the voluntary market. The National Council on Compensation Insurance, a nonprofit organization, manages the insurers’ participation in the residual market.
     The class of insurance providers accused AIG of underreporting billions of dollars in workers compensation premiums it had collected on the voluntary market, reducing the company’s losses based on its share of the residual workers compensation market.
     AIG settled the $3.1 billion claims for $450 million. The agreement released AIG from all claims that pool members held and also released counter-claims brought by AIG, which had accused some insurers of underreporting their premiums as well.
     Three named plaintiffs – Liberty Mutual and two subsidiaries, Safeco and Ohio Casualty – objected to the settlement, but a federal judge sidelined their concerns.
     Liberty Mutual had independently sued AIG for underreporting premiums in a number of states not involved in the class action. On appeal, Liberty Mutual argued that the $99 million it would receive from the settlement was insufficient to cover both losses stemming from the class action and its independent claim, which it valued at $25 million.
     Liberty Mutual’s subsidiaries also argued that the class should have been broken down into three subclasses, based on which members were facing counter-claims by AIG. The subsidiaries complained that the counter-claims had unfairly reduced the value of some class members’ claims.
     But 45 days after the 7th Circuit heard oral arguments in the case, the parties asked the court to dismiss the appeal. Liberty Mutual and AIG had reached a separate settlement agreement.
     Rather than simply approving the request, however, the three-judge appellate panel reviewed the original settlement to ensure that Liberty Mutual’s changed stance would not have adverse effects on other members of the class.
     The judges split two-to-one. Chief Judge Frank Easterbrook and Judge Daniel Manion formed the majority, concluding that “the settlement does not jeopardize the interests of the unrepresented class members.”
     “A settlement between Liberty Mutual and AIG while the appeal was pending works as a belated opt-out, which has no greater potential to injure the pool’s other members than an opt-out before the district court acted would have done,” Easterbrook wrote.
     The terms of the original settlement agreement remained unchanged, Easterbrook pointed out. Moreover, by waiting to file until one day before the end of the window for appeal, Liberty Mutual ensured that class members would not rely on its appeal rather than filing their own.
     The majority noted that the settlement was supported by the reinsurance pool’s manager, and that class members were likely well-represented throughout the settlement process.
     “All members of the class are large and sophisticated businesses, many with millions on the line and legal staffs to protect their interests,” Easterbrook wrote. “Even the smaller insurers receive more than $100,000 from the settlement.”
     But Judge Richard Posner disagreed, penning an eight-page dissent that called dismissal “premature” and reliant “on speculation rather than on evidence.”
     Posner also criticized the majority for assuming that the briefs submitted by Liberty Mutual’s subsidiaries should be considered extensions of Liberty Mutual’s own arguments. The briefs correctly observed that settlement failed to distinguish between class members base on who had been targets of AIG’s counter-claims.
     “To allow Liberty’s subsidiaries to withdraw their objection to the size of settlement and to the alleged misallocation of settlement proceeds among the remaining class members could deny the class a shot at a larger and more equitably distributed settlement,” he wrote.
     Moreover, Posner mused, Liberty Mutual may have been unduly influenced to abandon the interests of the class based on the amount of AIG’s offer.
     “For all we know, the amount that AIG has agreed to pay Liberty to drop its appeal is not just an estimate of the value of Liberty’s individual claim beyond its share of the class action settlement, but includes a ‘bribe’ given to Liberty by AIG to take the issue of equitable allocation of settlement proceeds among class members out of contention.”
     The court should have conducted its own investigation, Posner wrote, and required AIG and Liberty Mutual to submit a copy of their settlement agreement.

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