COLUMBIA, S.C.—American International Group Inc. policyholders can proceed with a lawsuit alleging that underreporting of workers compensation premiums by the insurer harmed them, South Carolina's Supreme Court has ruled.

The ruling in Temporary Services Inc. vs. American International Group Inc. stems from a lawsuit filed in 2008 in U.S. District Court in Columbia, S.C. The plaintiffs in that case are seeking class action status on behalf of other policyholders that purchased AIG workers comp coverage between June 1, 1990, through July 1, 2007, court records show.

Plaintiffs claim several AIG units fraudulently charged excessive workers comp premiums by engaging in fraudulent practices, including underreporting premiums to the state Department of Insurance and an assigned risk pool.

The underreporting of premiums played a role in helping AIG inflate a loss-cost multiplier that insurers use to set their pricing, said Richard A. Harpootlian, a Columbia, S.C., attorney at Richard A. Harpootlian P.A. Inflating the loss-cost multiplier ultimately helped AIG inflate premiums that policyholders paid AIG, said Mr. Harpootlian, who represents the plaintiffs in the case.

The federal court hearing the case essentially asked South Carolina's Supreme Court to determine whether a state filed-rate doctrine bars the plaintiffs' lawsuit. The doctrine says that because a state agency has the authority to determine reasonable rates, courts should not decide that issue.

The state Supreme Court on Monday ruled that because South Carolina's Department of Insurance was “not vested with the authority to determine the rates applicable to the workers compensation policies at issue...the filed-rate doctrine does not bar plaintiffs' claims.”

However, there is no evidence to support the allegation that AIG harmed policyholders by underreporting the comp premiums, an attorney representing AIG said Wednesday.

Even if AIG had underreported premiums to South Carolina's Department of Insurance, it would not have affected premium amounts paid by the policyholders suing New York-based AIG, said Jennifer Barrett, an attorney at Quinn Emanuel Urquhart & Sullivan L.L.P. in New York. The plaintiffs' math is faulty, Ms. Barrett said.

“The recent South Carolina Supreme Court decision is just an opinion on South Carolina law and is not a decision on the merits of the case,” Ms. Barrett said.