Three years after American International Group Inc. agreed to pay $343 million to resolve allegations that it underreported workers compensation premiums to states, the matter is far from settled.

New York-based AIG in 2006 entered a settlement agreement with then-New York Attorney General Eliot Spitzer and the New York Insurance Department, agreeing to disperse $343 million among all the states for allegedly underpaying premium taxes and residual market assessments from about 1985 to 1996 (BI, Feb. 13, 2006).

To date, though, most of that money remains in a trust fund while insurance regulators in several states continue to investigate and negotiate with AIG to determine whether a larger settlement amount is in order, according to sources familiar with the process.

“Not all states were satisfied with the size of the (New York) agreement,” said one insurance regulator, who asked not to be identified. “In terms of the settlement capping at $343 million, AIG may not be out of the woods.”

An original deadline for states to opt into the 2006 agreement initially was set for that year. But the deadline has been extended several times and now is set for Dec. 31. And New York authorities could extend that again, sources said.

Meanwhile, in addition to states seeking more money from AIG, ongoing litigation between AIG and several competitors also may complicate the settlement process, sources said.

The AIG competitors, initially through a National Workers Compensation Reinsurance Pool operated by Boca Raton, Fla.-based NCCI Holdings Inc., have claimed violations of the Racketeer Influenced and Corrupt Organizations Act by AIG, among other allegations. In their complaint, which seeks more than $1 billion in damages from AIG, the companies argue AIG's alleged underreporting of workers comp premiums forced them to unfairly increase their state residual market contributions.

In response, AIG countered with its own lawsuit claiming its competitors also violated RICO and underpaid residual market assessments.

In its lawsuit, AIG charges that its competitors have “conspired to disable” the fund established under the 2006 settlement with New York authorities. AIG says in its lawsuit that its competitors “effectively shut down the fund” by sending warnings to state regulators that there may be problems with their acceptance of distributions from the New York fund.

Several state regulators declined to comment, citing an ongoing investigation and settlement discussions, but the State of Nevada Division of Insurance confirmed it received a letter from Liberty Mutual Group Inc. “urging us not to take any action in connection with the settlement, stating that "the structure of the settlement appears to be inadequate and ineffective in addressing the rights of the workers compensation residual market mechanisms and the individual insurance companies.'”

Liberty Mutual declined to comment, but several of its units have sought court approval to become lead plaintiffs in the Chicago federal court suit against AIG (BI, Sept. 2).

The regulator who asked not to be identified said the states' hesitation to opt into the original New York agreement helped AIG's competitors to pursue their claims.

“If the states would have signed on from the start, that probably would have been the end of the story,” the regulator said. “The other companies only became involved after they became aware that (the New York settlement) was not finalized and other states were looking at it.”

There also has been confusion about intended recipients of the New York settlement funds, sources say.

Although the original intent was for the states to receive distributions from the fund, the 2006 New York agreement with AIG left uncertainty as to whether the funds were to go to states or to insurers or insurance groups that may have paid more in state residual assessments because of AIG's alleged underreporting, the regulator said.

AIG declined to comment, as did insurance regulators for several states still working to determine whether AIG will have to pay more money.

The lead states in the multi-state examination are Delaware, Florida, Indiana, Massachusetts, Minnesota, New York, Pennsylvania and Rhode Island. All other states and the District of Columbia have agreed to participate in the multi-state examination.

But in an SEC filing for the financial period ended June 30, AIG reported that regulators from several states, working under a National Assn. of Insurance Commissioners group, have been examining its workers comp practices prior to 1996 as well as its compliance measures.

AIG said in the quarterly report that it cannot predict the outcome of the multi-state investigation “or provide assurance regarding regulatory action that may result from the investigation.”

The $343 million settlement reached in 2006 was part of a $1.64 billion fraud settlement AIG entered into with New York and federal authorities over broader civil fraud charges. (BI, Feb. 13, 2006)

While the New York settlement continues to drag on, at least one organization independently pursued litigation and has reached a settlement with AIG over allegations the insurer underreported workers comp premiums.

Minnesota's Workers' Compensation Reinsurance Assn. received $20 million from AIG, said Carl W. Cummins, the St. Paul-based organization's president and chief executive officer.

The WCRA took the position that New York officials did not have the authority to settle with AIG on its behalf, Mr. Cummins said. So it joined other Minnesota organizations in pursuing AIG, and on Sept. 12, 2008, he signed a stipulation for settlement with AIG, Mr. Cummins said.

Shortly after signing the settlement agreement, AIG had to turn to the federal government for a rescue package.

“I thought, "Well, there goes our $20 million,'” Mr. Cummins said. “But shortly thereafter, Treasury and the feds stepped in and infused AIG, and we had our check within 20 days.”