On August 20, 2009, the United States District Court for the Northern District of Illinois dismissed an action brought by the National Council on Compensation Insurance, Inc. (NCCI) against AIG, Inc. and its affiliates and subsidiaries. The NCCI charged AIG with the commission of a massive fraud against the National Worker’s Compensation Reinsurance Pool (the “Pool”), asserting claims under RICO and seeking an accounting, damages, and other relief. The NCCI alleged that the Pool’s total damages exceeded $1 billion. The court granted AIG’s motion to dismiss, holding that the NCCI failed to establish standing to assert claims on behalf of the Pool. National Council on Compensation Insurance, Inc. v. American International Group, Inc., No. 07-CV-02898 (N.D. Ill. Aug. 20, 2009). A copy of the opinion is available here.
The action concerned the workers’ compensation insurance market. Employers obtain workers’ compensation insurance coverage from insurers in what is known as the “voluntary market.” Insurers that provide coverage to the voluntary market are required by state law to provide coverage to the “residual market,” which is the market for employers who cannot obtain coverage on the voluntary market. Those employers obtain workers’ compensation insurance coverage through an individual state’s assigned risk plan. Under that plan, the amount of insurance an insurer is required to provide for the residual market is directly proportional to the amount of premiums it collects for the policy it writes for the voluntary market. Mem Op. 3.
The Pool is an unincorporated association that is active in more than 40 states. The Pool provides insurance companies with a means of complying with their residual-market requirements. The Pool is governed by Articles of Agreement (“the Agreement”), which is a contract to which all participating insurers (“Participating Companies”) are signatories. The Agreement provides that the NCCI is the administrator of the Pool and is responsible for its administration. The NCCI’s primary role is to calculate the “reinsurance participation rate” for each Participating Company, using premium data from the annual certified financial reports filed by each company. These rates reflect each company’s proportional share of the residual market on a state-by-state and policy-year-by-policy-year basis. The company’s annual reinsurance participation rate is the ratio of the amount of voluntary-market workers’ compensation premiums billed by that company (numerator) to the total amount of workers’ compensation billed in the voluntary market by all Participating Companies (denominator). Id. at 4. Therefore, “any company that underreports its premiums to NCCI decreases its reinsurance participation rate and the overall total used to calculate all the rates.” Id.
“In 2005, a New York state investigation revealed that AIG had, over several decades, provided false reports of its workers’ compensation premiums to NCCI and state tax authorities to evade its residual-market obligations.” Id. Thereafter, in 2006, AIG entered into settlement agreements, including a $1.6 billion settlement with New York and federal authorities. The Participating Companies contested that the settlement agreements offered full and fair restitution. Id. at 5.
On May 24, 2007, NCCI filed suit against AIG, alleging underreporting of premium data. AIG interposed numerous defenses and asserted counterclaims for an equitable accounting and an action on an open, current, and mutual account, both of which survived NCCI’s motion to dismiss. AIG also filed a 12-count third-party complaint against 24 named companies and numerous unnamed companies. Id. at 3.
AIG asserted a motion to dismiss the action for lack of subject-matter jurisdiction on the grounds that NCCI could not have standing to sue AIG for injuries alleged to have been suffered only by the Participating Companies. Id. at 7. The court granted the motion.
First, the court concluded that NCCI did not have first-party standing. The “Participating Companies gave NCCI the authority to prosecute their claims arising under breach of the Agreement,” but “the Participating Companies did not transfer legal title of their claims to NCCI.” Id. at 8. “Therefore, because NCCI does not hold title to the Participating Companies’ legal claims against AIG, it lacks Article III standing, suing solely as attorney-in-fact for the Participating Companies, to pursue the instant case.” Id.
Second, the court rejected NCCI’s contention that “it suffered direct injury because it relied on AIG’s misleading data in calculating and allocating the premium, losses, and expenses of the residual market.” The court observed that NCCI’s complaint did not allege “that either NCCI or the Pool were harmed as a direct and proximate result of AIG’s actions.” Id. at 9. “Rather the complaint alleges only that the Participating Companies suffered harm from AIG’s underreporting.” Id.
Third, the court rejected NCCI’s theory of “bailee standing.” NCCI contended that as “administrator of certain pass-through bank accounts created in the Pool’s name and administered by NCCI,” NCCI had “the right to receive, (1) accurate premium data from each Participating Company, and (2) payment from each Participating Company in satisfaction of its obligations to the Pool.” Id. at 10. On this basis, NCCI claimed that it had standing to bring suit on its own behalf because “AIG allegedly compromised these rights when it underreported its premium data.” Id. The court, however, concluded that the governing documents did not create a bailor-bailee relationship. To the contrary, “NCCI holds the funds for the Participating Companies’ benefit, and specified that NCCI shares control over the accounts with the Pool Board members.” NCCI thus did not have exclusive possession or control of the pass-through accounts. Id. at 11.
Fourth, the court rejected NCCI’s contention that it had trustee standing to bring suit on behalf of the Participating Companies. The court, however, concluded that, while the Agreement conferred NCCI with the authority to prosecute, settle, release, and compromise claims on behalf of the Participating Companies, “the Agreement failed to transfer title to the Participating Companies’ legal claims to NCCI.” Id. at 11-12.
Finally, the court concluded that NCCI did not have associational standing to bring suit on behalf of the Participating Companies. “An organization has associational standing, and may bring suit on behalf of its members when …(a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.” Id. at 13. The court held that the NCCI failed to satisfy the second and third requirements for associational standing. The court noted that “regarding the second prong, the Pool is an unincorporated association of insurance companies that have voluntarily agreed to participate in the arrangement that equitably apportions the risks arising from the residual workers’ compensation insurance market.” Id. at 14. Nonetheless, “the second prong of the…test has not been satisfied here because the complaint creates a serious conflict of interest among the Pool’s members.” Id. That is, “although the Participating Companies have explicitly authorized NCCI…to pursue intra-Pool claims, there remains a profound conflict among the Participating Companies if the suit by NCCI were allowed to proceed because NCCI would be suing a number of members on behalf of other members.” Id. at 15. The court further found that NCCI had failed to satisfy the third requirement for associational standing because “any equitable relief for damages compensation would require each individual company to proffer its premium data for each year and state,” so that “the ultimate resolution of this case may require a full mutual accounting conducted by a neutral party.” Id. at 16.
Though AIG dodged a bullet in the NCCI suit, AIG is not yet out of the woods. On April 1, 2009, Safeco Insurance Company and Ohio Casualty Insurance Company commenced a class action against AIG and its affiliated companies in the same court on allegations that mirror those in the NCCI action. Safeco Ins. Co. of Am. v. American Int’l Group, Inc., No. 09-CV-02026 (N.D. Ill. April 1, 2009). A copy of the complaint is available here.
As members of the Pool, Safeco and Ohio Casualty assert their action on behalf of a class that is comprised of the Participating Companies. Comp. L. ¶ 45. The complaint charges that AIG has engaged in and continues to engage in a series of long-standing false premium reporting practices with the purpose and effect of evading state insurance taxes and residual-market obligations.” Id. ¶¶ 6 – 10, 13 – 19. Safeco and Ohio Casualty allege that AIG has pursued “false” workers’ compensation premium reporting practices since the 1980s. Id. ¶¶ 67 — 68. The factual allegations draw heavily on a January 31, 1992 internal memorandum authored by Michael Joye, then AIG’s General Counsel. The memorandum, which is attached as Exhibit A to the complaint, limns AIG’s premium reporting activities. According to the memorandum, the amount of AIG’s unreported workers’ compensation premiums totaled $300-400 million annually, yielding a benefit in the range in excess of $60-80 million annually. Compl. ¶ 79.
