Booking premiums as general liability saved carrier 'tens ofmillions'

By Daniel Hays

American International Group documents indicate that improperaccounting by the company might have cheated New York out of “tensof millions” owed the state's workers' compensation fund over morethan a decade, regulatory officials announced last week.

New York Attorney General Eliot Spitzer and InsuranceSuperintendent Howard Mills said that as a consequence, theinsurance department is appointing a consultant to audit “years ofalleged improper booking of workers' compensation premiums.”

An AIG representative said the activity involved had generallybeen corrected eight years ago and stressed that the company wascooperating with the inquiry.

New York officials said the practice to be audited, now“apparently” discontinued, involved booking premiums for workers'comp coverage as premiums for general liability. They said theactivity appears to have gone on for over 10 years, and continuedeven after AIG insiders repeatedly challenged its legality.

It was explained that by booking the premium income as somethingother than workers' comp, AIG avoided paying its true share intovarious workers' comp funds.

An insurance department representative, Mike Barry, explainedthat among the operations insurers pay into is the State Workers'Compensation Security Fund. Carriers pay 1 percent of the totalpremiums they collect for workers' comp insurance.

The fund pays the obligations of insolvent insurers to injuredworkers. It currently makes payments to 7,500 workers.

According to the officials, one AIG document dating from theearly 1990s roughly estimated an unlawful benefit to AIG of tens ofmillions of dollars annually. The audit consultant, they said, willdetermine what portion of this money, if any, is owed to New Yorkor others.

The probe of AIG by the two agencies found that in 1992, aninternal AIG legal memorandum to top management reported that thepractice was illegal and followed similar warnings made yearsearlier.

At this point investigators have not determined when thepractice stopped, according to the state officials, who said thereis no evidence that AIG disclosed the practice to regulators ormade restitution.

An AIG representative, Chris Winans, said the accountingreferred to by the regulators “largely had been corrected by 1997.As we have said in the past on all regulatory matters, we arecommitted to being as cooperative as possible.”

The information disclosed by Mr. Spitzer and Mr. Mills wasturned up as part of an internal AIG review being conducted by twolaw firms–Paul, Weiss, Rifkind, Wharton & Garrison and SimpsonThacher & Bartlett.

The announcement by the New York authorities was followed byword that the California Insurance Department would look into AIG'sworkers' comp premium reporting as well. Norman Williams, arepresentative for the department, said it would examine if anysuch irregularities occurred involving AIG and other workers' compinsurers writing in California.

AIG has been undergoing an intensive in-house investigation torestate various items in its 10-K annual report filing with theSecurities and Exchange Commission.