Am. Int'l Grp. Inc. v. Ace Ina Holdings, Inc.

• Decision Date: 26 July 2011
• Docket Number: No. 07 C 2898,No. 09 C 2026,07 C 2898,09 C 2026
• Parties: AMERICAN INTERNATIONAL GROUP, INC., ET AL., Plaintiffs, v. ACE INA HOLDINGS, INC., ET AL., Defendants. SAFECO INSURANCE COMPANY OF AMERICA, et al., individually and on behalf of a class consisting of members of the National Workers Compensation Reinsurance Pool, Plaintiffs, v. AMERICAN INTERNATIONAL GROUP, INC., ET AL., Defendants.
• Court: U.S. District Court — Northern District of Illinois

AMERICAN INTERNATIONAL GROUP, INC., ET AL., Plaintiffs,

v.ACE INA HOLDINGS, INC., ET AL., Defendants.

SAFECO INSURANCE COMPANY OF AMERICA, et al., individually and on behalf of a class consisting of members of the National Workers Compensation Reinsurance Pool, Plaintiffs,

v.AMERICAN INTERNATIONAL GROUP, INC., ET AL., Defendants.

No. 07 C 2898

No. 09 C 2026

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

ENTER: July 26, 2011

Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

After many years of litigation and regulatory action, American International Group, Inc. and its affiliated companies (together "AIG") have agreed to settle this putative class action for $450 million. The court's previous opinions ¹ describe AIG's alleged decades-long, multi-billion dollar fraudulent underreporting of workers compensation premiums for the purpose ofreducing its share of the residual workers compensation market—and consequently increasing the residual market costs of the other members of the National Workers Compensation Reimbursement Pool ("NWCRP").²

The genesis of the proposed settlement began when eight states,³ acting through the National Association of Insurance Commissioners ("NAIC"), decided to conduct a multistate examination of AIG, and appointed David Leslie as "Examiner in Charge" in January 2008.⁴ Leslie retained Merlinos & Associates, Inc. (led by Matthew Merlino) as actuarial consultants, and concentrated on AIG's conduct primarily in the years after 1985, a period during which Merlino determined "the workers compensation market experienced usually high residual market obligations." The examination focused on two divisions of AIG: 50 and 51/55.⁵

Employing "a methodology for reallocating AIG's premium to line of business and state based on AIG's loss experience," Leslie and Merlino calculated that AIG had underreported approximately $2.1 billion of workers compensation premium up to 1996.⁶ Merlino and Leslie'scash flow damages model⁷ calculated that this $2.1 billion of underreporting resulted in approximately $178,646,857 million of residual market damages to the class (members of the Pool). To account for the time value of money, Leslie and Merlino applied a yearly interest rate using data from A.M. Best,⁸ resulting in an additional $196,035,542 in interest. The total compensatory damages was therefore calculated to be $374,682,399.

Acting on behalf of the states who retained him as Examiner, and in conjunction with other class members (described below), Leslie negotiated with AIG over an extended period of time, both developing the methodologies described above and arriving at a final settlement figure of $450 million to the class. Along with the approximately $375 million in economic damages (plus interest), the $450 million figure included an additional $70 million. Using this figure, Leslie and Merlino devised a plan of allocation to distribute the funds to each class member based upon their participation in the market. These distributions range from zero to tens of millions of dollars.

The proposed settlement agreement also provides for an escape clause: AIG may terminate the agreement if any potential class member—excluding Liberty and any of its affiliates, subsidiaries, divisions, or units (a category that includes but is not limited to the Objectors, defined below)—with one percent or more of the class fund's allocation opts out,and/or if potential class members—again excluding the Liberty companies—that together add up to at least five percent of the class fund's dollar amount opt out.

In addition to reaching the proposed settlement with the class, AIG also agreed to pay the states $100 million in penalties plus $46,507,385, in back taxes and assessments, and has agreed to reform its workers compensation reporting to comply with its legal obligations on a going-forward basis. This so-called Regulatory Settlement Agreement ("RSA") is conditioned on approval of the instant class action settlement by December 31, 2011.

The class settlement described above was the product of negotiations between AIG, the Examiner, and certain Pool (class) members (the "Settlement Class Plaintiffs"),⁹ and has been approved by the insurance commissioners of all 50 states and the District of Columbia. Based on the support of the Settlement Class Plaintiffs, the Board defendants who have been dismissed and have agreed not to object or opt out, and one company that has expressed its support in a declaration, the aggregate dollar support for the proposed settlement is roughly $170 million, or 37 percent of the proposed settlement fund. If the Liberty companies opt out, 48 percent of the remaining allocable dollars have stated their support. The proposed settlement was reached over the strong objections of Safeco Insurance Company of America and Ohio Casualty Insurance Company (the "Objectors"), the two original class plaintiffs in Case No. 09 C 2026 (the " '09 Action").¹⁰

On January 13, 2011, this court allowed the Settlement Class Plaintiffs to intervene, stayed the Objectors' fully-briefed motion for class certification (proposing the Objectors as class representatives and their attorneys as class counsel), and allowed the Settlement Class Plaintiffs to file the instant motion for class certification and preliminary approval of the above-described settlement. The Objectors agree that the Settlement Class Plaintiffs have met all of Fed. R. Civ. P. 23's requirements, with the notable exceptions of the adequacy of representation by the Settlement Class Plaintiffs and their counsel, and the reasonableness of the $450 million settlement amount.

The Objectors' overarching criticisms of the proposed class and settlement are twofold. First, the Objectors contend that because the proposed settlement agreement includes mutual releases by and of all class members and AIG, the Settlement Class Plaintiffs and their counsel are laboring under a serious conflict of interest. The purported conflict results from AIG's allegations in Case No. 07 C 2898 (the "'07 Action")¹¹ that nineteen insurance companies that served on the Board of Governors of the NWCRP Pool (the "NWCRP Board")—including three of the seven Settlement Class Plaintiffs (ACE, Travelers, and Hartford)—are, like AIG, guilty of underreporting workers compensation premiums during the relevant period. (These companiesare referred to as the "alleged underreporters" or "AURs".) The Objectors claim that the releases confer a significant benefit on ACE, Travelers, and Hartford and their counsel, while the releases are valueless to non-AUR class members. Second, the Objectors criticize the methodology and motives of Leslie and Merlino, claiming that they, like the Settlement Class Plaintiffs and their lawyers, labor under a conflict of interest because they are representing the states, whose settlement agreement with AIG is conditioned on settling the class action by the end of this year.

The parties (the Settlement Class Plaintiffs, AIG, and the Objectors) have filed hundreds of pages of briefs, many more hundreds of pages of declarations (many of which read like briefs), and many thousands of pages of exhibits. Despite this voluminous record, the sole issues before the court are whether the putative settlement class meets Rule 23's adequacy requirement, and whether the settlement should be preliminarily approved, allowing the members of the class, all insurance companies, to examine the terms and positions of the respective parties and voice any support or objections at a final fairness hearing.

Class Certification

Before assessing whether the settlement is within the range of reasonableness to allow it to proceed to a final fairness hearing, the court must conduct an independent class certification analysis. This analysis "demand[s] undiluted, even heightened, attention" when applied to classes for which certification is sought for settlement purposes only. Amchem Prods. v. Windsor, 521 U.S. 591, 620 (1997); Smith v. Sprint Commc'ns Co., 387 F.3d 612, 614 (7th Cir. 2004). This heightened attention is necessary when certifying a settlement class because the court will not have the same opportunity to adjust the class throughout the course of extensive proceedings as it would for a litigation class. See Amchem, 521 U.S. at 620.

The Objectors argue, and the court agrees, that the court "must not permit any perceived fairness of the settlement terms, the sophistication of the class members, the ability of Class members to opt-out, or the information contained in the proposed class notice to operate as a substitute for [a] thorough, rigorous [adequacy] analysis." (Emphasis added.) The Objectors, however, imprecisely deduce from that unobjectionable reading of Amchem that this court "must carefully scrutinize the adequacy of [Settlement Class Plaintiffs and Settlement Class Counsel], independently of considerations concerning the settlement's fairness." (Emphasis in original.) Amchem says no such thing. In fact, it says almost the opposite: while the court should not allow its "gestalt judgment or overarching impression of the settlement's fairness" to control its decision, "settlement is a factor in the calculus," and the court acts properly in "hom[ing] in on settlement terms" when assessing adequacy of representation. Amchem, 521 U.S. at 619. Consideration of the fact of settlement, and the settlement's terms, undoubtedly implicates the settlement's fairness. In conducting the class certification analysis, the court will therefore consider the existence of a proposed settlement and its terms, not as decisive factors, but as relevant considerations to the adequacy of the class representatives and class counsel. See Smith, 387 F.3d at 614; AT&T Mobility Wireless Data Servs. Sales Litig., 270 F.R.D. 330, 340 (N.D. Ill. 2010) ("The fact that the parties have reached a settlement is a relevant consideration in the class-certification...