Liberty Mutual Group and American International Group Inc. have reached a settlement over a $450 million workers' compensation case, clearing the way for other carriers involved to receive $351 million, according to court papers.
Last year, Liberty Mutual's subsidiary Safeco Insurance Company of America filed an appeal in an attempt to block the $450 million settlement between AIG and a group of workers' comp writers, including Liberty Mutual.
The settlement would resolve AIG's alleged under-reporting of workers' comp premiums.
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. There are a total of 1,363 companies involved in the settlement, according to court papers.
Liberty Mutual, which stood to receive 22% of the $450 million settlement, or $99 million, had argued AIG owed $3.1 billion.
However, Liberty Mutual and AIG have since reached a separate settlement agreement, the terms of which were not released. As a result, Liberty Mutual's challenge in the case, which had been in the U.S. Court of Appeals for the Seventh Circuit, has been dismissed.
"The terms of the settlement do not matter to the other members of the class, who still split $351 million among them," Chief Judge Frank Easterbrook of the U.S. Court of Appeals for the Seventh Circuit wrote. "Ace and the other representatives are content. It is accordingly hard to see how a live controversy remains, and courts should not issue opinions resolving litigations that the parties no longer want to pursue."
Writing for the minority, Circuit Judge Richard Posner said the court should not "dismiss the appeal without at least informing ourselves of the terms of Liberty's settlement with AIG. In dismissing the appeals without doing so we are acting in haste, and for no good reason."
Attempts to reach Liberty Mutual and AIG for comment were not immediately successful.
The legal dispute had centered 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.
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 originally filed in the U.S. District Court for the Northern District of Illinois Eastern Division. Liberty Mutual Insurance Cos. and members of AIG currently have a Best's Financial Strength Rating of A (Excellent). Shares of AIG were trading at $38.29 on the afternoon of April 1, down 1.37% from the previous close.