Fraud by Insurer in Calif. Alleged

American International Group Inc. deliberately underreported California workers’ compensation insurance premiums for years to save millions of dollars in taxes and state fees, according to a lawsuit filed by New York Atty. Gen. Eliot Spitzer.

The alleged deception was one of many fraudulent practices aimed at boosting the New York-based company’s stock price, Spitzer charged. It was personally directed by AIG’s former chief executive, Maurice “Hank” Greenberg, according to the attorney general’s lawsuit.

Spitzer’s suit, filed Thursday, capped a three-month investigation into AIG that has battered the company’s stock and led to the resignation last month of Greenberg, an 80-year-old industry legend who made his company the world’s biggest insurer over the last four decades.

Spitzer and New York Insurance Superintendent Howard Mills said they had given results of their investigation -- based in part on internal company documents -- to the California Department of Insurance.

“We’re determining what we will do here in California,” said Norman Williams, a spokesman for Insurance Commissioner John Garamendi.

In a statement issued Friday, AIG said it had no comment on the lawsuit, other than to say that the company was cooperating with the New York attorney general and insurance commissioner. The company in April acknowledged that it had underreported workers’ compensation premiums.

Last year AIG was California’s largest private writer of workers’ compensation insurance, controlling about 7% of the market with total annual premiums of $1.1 billion, according to the state Department of Insurance.

Spitzer’s suit alleges that AIG deliberately understated the value of workers’ compensation premiums it collected in California throughout the 1990s. This allowed AIG to reduce the taxes it paid on premiums and the surcharges the state collected during some years on policies to cover outstanding claims against insolvent insurers, the suit said.

The alleged underreporting of premiums allowed AIG to save “millions of dollars illegally each year,” the suit said. Neither New York nor California officials had a more precise estimate.

Spitzer’s suit said the company contended it had stopped the practice but couldn’t say exactly when. The misreporting appears to have continued through at least 2000, the suit says.

AIG did nothing to stop the alleged underreporting despite requests from company lawyers, the suit said.

In one case, the insurer’s general counsel warned in 1991 that “a jury could find that the above conduct constitutes various kinds of state and federal civil and criminal violations, including common law fraud, mail fraud, Securities Act violations, RICO [racketeering] violations, state statutory and regulatory violations, state tax fraud and breach of contract,” Spitzer’s suit said, citing internal company documents.

Then-CEO Greenberg directly approved the misreporting scheme, the suit said. The AIG general counsel’s personal notes show a company employee said, “You should be aware that MRG [Greenberg] knows about this and has approved it,” the suit said.

J. Robert Hunter, a former Texas insurance commissioner and an expert with the Consumer Federation of America, said he was not surprised to see allegations that Greenberg was personally involved in fraud.

“I think he knew a lot about everything that was going on in his company,” Hunter said. “Money was always a huge driving force, and the pressure was always on to achieve financial goals that were high.”