American International Group (NYSE: AIG) has a green light to precede in federal court against a host of national and regional workers' comp carriers alleging a conspiracy to harm AIG by underreporting their workers' comp premiums to lower their contributions to a assigned risk national reinsurance pool. The carriers include Liberty Mutual, Travelers (NYSE: TRV), The Hartford (NYSE: HIG) Ace (NYSE: ACE) and more than a dozen others, many of whom have a similar case pending against AIG accusing it of essentially the same behavior.

The central issue in the case is not directly related to the carriers' California operations, but that doesn't mean it isn't a concern for the Golden State. The case alleges underpayments to the National Workers' Compensation Reinsurance Pool (NWCRP), which covers assigned risk policies in numerous states with a residual market for employers who are unable to obtain coverage from the voluntary market. California does not have an assigned risk pool, but the underlying issue is accurate reporting of workers' comp premiums.  In California, the data  issue has arisen concerning the accuracy data reported to and promulgated by Workers’ Compensation Insurance Rating Bureau of California.

If the allegations the cases prove true they would be indicative of widespread, systematic underreporting of workers' comp premiums in other states and could indicate underreporting here. If that's the case then that means the California Insurance Guarantee Association (CIGA) and other agencies funded by assessments on workers' comp premiums would have been shortchanged -- perhaps for years as the allegations of underreporting date back to the 1980's.

CIGA uses its assessments to support its operations and pay down its bond debt. Assessments also support the Division of Workers’ Compensation, the Workers' Compensation Appeals Board, Cal/OSHA and statewide anti-fraud efforts, among other programs, so accurate reporting of workers' comp premiums is a necessity.

Judge Robert Gettleman's ruling allows the federal RICO and conspiracy charges to proceed, but he did throw out AIG's claim of unjust enrichment due to its competitor's alleged actions. Last fall Gettleman tossed a $1 billion lawsuit alleging underreporting by AIG that was filed by the National Council on Compensation Insurance (NCCI), which administers the NWCRP pool, finding that it lacked standing to bring the case. The lawsuits filed by AIG's competitors, however, were not affected by that decision and Gettleman refused AIG's request in the present case to dismiss those actions.

The ruling means that AIG's case can move forward, but a trial -- if there ever is one -- is still a long way off.

For a copy of Gettleman's latest ruling click here. For past coverage of the issue see   AIG Renews... and  AIG Reporting Concerns...

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