Liberty Mutual to Appeal $450 Million AIG Workers’ Comp Class-Action Settlement

Over Liberty Mutual Group's opposition, a federal judge has approved a $450 million class-action settlement with American International Group and a group of workers' compensation writers to resolve AIG's scheme of under-reporting workers' comp premiums. Liberty Mutual plans to fight on, however.

"Liberty Mutual is disappointed — but not surprised — with the judge's final written order approving the settlement. Liberty Mutual has filed an appeal," Adrianne Kaufmann, a spokeswoman for the company, said in an email.

Mark Herr, AIG spokesman, said in an email that AIG is "pleased to have resolved this matter."

U.S. District Judge Robert W. Gettleman issued a 39-page order approving the settlement, which he initially approved in December (Best's News Service, Dec. 28, 2011).

AIG and seven insurers supported the settlement. Those insurers are Ace Ina Holdings Inc., Auto-Owners Insurance Co., Companion Property & Casualty Insurance Co., Firstcomp Insurance Co., Hartford Financial Services Group Inc., Technology Insurance Co. and Travelers Indemnity Co.

Liberty Mutual Group and two subsidiaries, Ohio Casualty and Safeco, had opposed the settlement, saying it is inadequate.

"We respectfully and vigorously disagree that the settlement is fair, reasonable and adequate. The settlement was negotiated by conflicted parties and it is unfair because it reflects damages of $2.1 billion, far less than the $6.1 billion in actual damages demonstrated by the court approved statistical model," Liberty Mutual's Kaufmann said.

Still, because of their work in the lawsuit, the judge's order includes $14.8 million in attorneys' fees for Safeco and Ohio Casualty.

"Had these two class members not served as named plaintiffs for the litigation class, there might not have been a class action in the first place, and the settlement class plaintiffs would have had nothing to settle," Gettleman said in the order.

He also authorized $2 million in attorneys' fees for Liberty Mutual. "When no other PC was willing to step forward and serve as a named plaintiff, Liberty volunteered two of its subsidiaries, Safeco and Ohio Casualty, to fill that role," Gettleman said.

The legal dispute centers on allegations that AIG intentionally underestimated its workers' comp premiums to avoid premium taxes and substantial residual market charges before 1996. In some states, from the mid-1980s to the mid-1990s, the residual market losses were greater than the residual market and voluntary market premium combined, so the more voluntary premium a company wrote, the more it had to pay out to cover its share of the residual market losses. That gave companies an incentive to under-report workers' comp claims, according to court papers (Best's News Service, Aug. 23, 2011).

The settlement is based on the assumption that AIG under-reported its workers' comp premiums before 1996 by $2.1 billion, the same amount that state regulators used to calculate a settlement in 2010. Liberty Mutual has maintained that $2.1 billion estimate is too low.

The case was filed in the U.S. District Court for the Northern District of Illinois Eastern Division.

Liberty Mutual Insurance Cos. and members of AIG (NYSE: AIG) currently have a Best's Financial Strength Rating of A (Excellent). Shares of AIG were trading at $28.61 on the morning of March 9, up 1.08% from the previous close.

(By Meg Green, senior associate editor, BestWeek: [email protected])