AIG 2005 Annual Report Download - page 161

AMERICAN INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
(i) Regulators from several states have commenced investiga-
12. Commitments and Contingent Liabilities
tions into insurance brokerage practices related to contingent
Continued
commissions and other broker-related conduct, such as alleged
purchase interests in Starr and that all eligible shareholders bid rigging. Various parties, including insureds and sharehold-
had tendered their shares. As a result of completion of the ers, have also asserted putative class action and other claims
tender offer, no executive currently holds any Starr interests. against AIG or its subsidiaries alleging, among other things,
violations of the antitrust and federal securities laws, and AIG
(g) AIG and certain of its subsidiaries have been named
expects that additional claims may be made.
defendants in two putative class actions in state court in
In February 2006, AIG reached a resolution of claims and
Alabama that arise out of the 1999 settlement of class and
matters under investigation with the United States Department
derivative litigation involving Caremark Rx, Inc. (Caremark).
of Justice (DOJ), the Securities and Exchange Commission
An excess policy issued by a subsidiary of AIG with respect to
(SEC), the Office of the New York Attorney General (NYAG)
the 1999 litigation was expressly stated to be without limit of
and the New York State Department of Insurance (DOI). The
liability. In the current actions, plaintiffs allege that the judge
settlements resolved outstanding litigation filed by the SEC,
approving the 1999 settlement was misled as to the extent of
NYAG and DOI against AIG and concluded negotiations with
available insurance coverage and would not have approved the
these authorities and the DOJ in connection with the
settlement had he known of the existence and/or unlimited
accounting, financial reporting and insurance brokerage prac-
nature of the excess policy. They further allege that AIG, its
tices of AIG and its subsidiaries, as well as claims relating to
subsidiaries, and Caremark are liable for fraud and suppression
the underpayment of certain workers compensation premium
for misrepresenting and/or concealing the nature and extent of
taxes and other assessments. The 2005 financial statements
coverage. In their complaint, plaintiffs request compensatory
include a fourth quarter after-tax charge of $1.15 billion to
damages for the 1999 class in the amount of $3.2 billion, plus
record the settlements.
punitive damages. AIG and its subsidiaries deny the allegations
As a result of these settlements, AIG made payments
of fraud and suppression and have asserted, inter alia, that
totaling approximately $1.64 billion, $225 million of which
information concerning the excess policy was publicly disclosed
represented fines and penalties. A substantial portion of the
months prior to the approval of the settlement. AIG and its
money will be available to resolve claims asserted in various
subsidiaries further assert that the current claims are barred by
regulatory and civil proceedings, including shareholder lawsuits.
the statute of limitations and that plaintiffs’ assertions that the
Also, as part of the settlements, AIG has agreed to retain
statute was tolled cannot stand against the public disclosure of
for a period of three years an independent consultant who will
the excess coverage. Plaintiffs, in turn, have asserted that the
conduct a review that will include the adequacy of AIG’s
disclosure was insufficient to inform them of the nature of the
internal control over financial reporting and the remediation
coverage and did not start the running of the statute of
plan that AIG has implemented as a result of its own internal
limitations. On January 28, 2005, the Alabama trial court
review.
determined that one of the current actions may proceed as a
Various federal and state regulatory agencies are reviewing
class action on behalf of the 1999 classes that were allegedly
certain other transactions and practices of AIG and its
defrauded by the settlement. AIG, its subsidiaries, and
subsidiaries in connection with industry-wide and other inquir-
Caremark are seeking appellate relief from the Alabama
ies. AIG has cooperated, and will continue to cooperate, in
Supreme Court. AIG cannot now estimate either the likeli-
producing documents and other information in response to the
hood of its prevailing in these actions or the potential damages
subpoenas.
in the event liability is determined.
A number of lawsuits have been filed regarding the subject
(h) On December 30, 2004, an arbitration panel issued its matter of the investigations of insurance brokerage practices,
ruling in connection with a 1998 workers compensation quota including derivative actions, individual actions and class
share reinsurance agreement under which Superior National actions under the federal securities laws, Racketeer Influenced
Insurance Company, among others, was reinsured by USLIFE, a and Corrupt Organizations Act (RICO), Employee Retirement
subsidiary of American General Corporation. In its 2-1 ruling Income Security Act (ERISA) and state common and corpo-
the arbitration panel refused to rescind the contract as rate laws in both federal and state courts, including the United
requested by USLIFE. Instead, the panel reformed the contract States District Court for the Southern District of New York
to reduce USLIFE’s participation by ten percent. USLIFE (Southern District of New York), in the Commonwealth of
disagrees with the ruling and is pursuing all appropriate legal Massachusetts Superior Court and in Delaware Chancery
remedies. USLIFE has certain reinsurance recoverables in Court. All of these actions generally allege that AIG and its
connection with the contract and the arbitration ruling subsidiaries violated the law by allegedly concealing a scheme
established a second phase of arbitration in which USLIFE will to ‘‘rig bids’’ and ‘‘steer’’ business between insurance companies
present its challenges to cessions to the contract. and insurance brokers.
AIG recorded a $178 million pre-tax charge in the fourth Since October 19, 2004, AIG or its subsidiaries have been
quarter of 2004 related to this matter and holds a reserve of named as a defendant in fifteen complaints that were filed in
approximately $364 million as of December 31, 2005. federal court and two that were originally filed in state court
(Massachusetts and Florida) and removed to federal court.
These cases generally allege that AIG and its subsidiaries
AIG m Form 10-K 109