Could X-Mods Become Common Parlance?

American International Group (AIG) has been through the ringers this past decade with a government takeover, accusations of financial manipulations and lawsuits by various state insurance departments, the ouster and subsequent retaliation of former CEO Maurice "Hank" Greenberg, and of course Wall Street's displeasure with all of these shenanigans.

But the carrier is probably facing one of the more significant legal challenges in its history if the plaintiff in a South Carolina case succeeds in obtaining class action status from a federal judge.

Thrift Development, a South Carolina general contractor, alleges that AIG failed to include subrogation reimbursements and recoveries from the South Carolina Second Injury Fund and other third parties in the claims data it reports to the NCCI, thereby denying it and other employers in the state the chance to have their X-Mods appropriately revised.

Federal courts are notoriously difficult for plaintiffs to proceed in - the federal jurisdictions don't like penny-ante cases wasting federal judiciary time and money. That U.S. District Court Judge Mary Lewis last September upheld Thrift Development's complaint against various challenges by AIG relative to stating a justiciable cause of action is significant.

That Judge Lewis hasn't summarily dismissed Thrift's request for class action status also speaks volumes towards the possible legitimacy of the claim.

Now Judge Lewis has also upheld Thrift's discovery request and has ordered AIG to produce documents and information concerning third-party recoveries and reimbursements it received for workers’ compensation claims going back to 1999 and later years within 20 days.

Thrift alleges that in the 2006-07 policy year it paid workers’ compensation premiums to AIG companies that reflected the full loss value of a claim that AIG had submitted for reimbursement from the South Carolina Second Injury Fund.

Also, Thrift says, despite having been reimbursed by SCSIF, the AIG companies failed to revise the unit statistical reports it submitted to NCCI to accurately reflect the reimbursement and recovery.

As a consequence, Thrift alleges that it has overpaid for insurance since then due to an improperly calculated x-mod.

To those of you unfamiliar with the method that workers' compensation premiums are devised, the x-mod, or experience modification factor, is an adjustment to the base rate of an employer's premium based on loss history. In most systems, insurance company recoveries are to be credited against an employer's loss history and such credit would lower the x-mod.

Thrift alleges that AIG didn't report these recoveries and that such failure was intentional in order to boost subsequent year premiums.

AIG counters that Thrift cannot prove that its final premium charged was inflated or otherwise improper in any way. It accuses the employer of failing to exhaust administrative remedies that are provided by the South Carolina Department of Insurance for such disputes.

So far those defenses haven't worked.

Imagine if this case goes across borders, and jurisdiction over AIG's practices in other states with similarly situated plaintiffs is assumed either in the Thrift Development case or in other cases. The costs of defense and complying with discovery are enormous. But if Thrift is right, and AIG intentionally failed to report its recoveries, big damages could ensue.

The time period during which these allegations of malfeasance is also the same time period of other malfeasance that has been litigated, and mostly settled - including lawsuits by other insurance companies claiming that AIG systematically misrepresented financial dealings to state insurance departments.

A witness in the Thrift case, who talked to WorkCompCentral on the condition of anonymity, said, "If this gets litigated and AIG gets into the newspapers, there is going to be a snowball effect of claims. Right now there are a very few people in the whole United States who understand X-Mods and they would want it to stay that way."

This witness predicts a quiet settlement of the case.

But we all know that what one entity does in workers' compensation tends to be replicated by many - there's not really a whole lot of original thought in this industry. Lemming behavior runs rampant. The workers' compensation industry works a lot on routine - just because something has always been done a certain way means that it will be done that certain way by everyone.

Could other carriers face similar allegations? I don't know, but this is a case, like that witness said, which probably will go away quietly.

The consequences of actually fighting this into public attention are too great if people end up actually knowing what an x-mod is.