N.Y. Blinks in Settlement over AIG Agent Practices
November 9, 2014 by Arthur D. Postal
WASHINGTON – American International Group’s settlement with New York regarding activities conducted by subsidiaries it owned but domiciled elsewhere was a victory for the company, according to an industry lawyer.
The case has major implications because states, as in the battle over unclaimed property, are scrounging everywhere for revenues during a period of severe economic downturn.
Robert Shapiro, a lawyer in the Washington office of Carlton Fields Jorden Burt, noted that the New York Department of Financial Services settled with AIG for less than it did with another party, MetLife. He said the DFS and its superintendent, Benjamin Lawsky, probably settled because “a victory wasn’t assured.”
Shapiro said that NY DFS settled because it “realized it wasn’t a certainty it could win this case.” And, he said, “AIG settled because it is horribly expensive to litigate and AIG is in the business of providing insurance, not litigating.”
At the same time, Shapiro cautioned that all insurers need to be careful when they conduct business in New York. “Insurers generally try to adhere to the law, but when the law is not clear, New York regulators think insurance companies are cash cows.”
Specifically, AIG agreed to pay the state $35 million to settle allegations that subsidiaries domiciled in Delaware solicited insurance business in New York without a license and made “intentional misrepresentations and omissions” to the DFS about those activities.
By contrast, Metlife, paid $50 million in fines and another $10 million in April to settle the case.
NYDFS alleged that AIG sales representatives conducted “road shows” in New York to solicit and sell group insurance products of ALICO, DelAm and their subsidiaries and affiliates and other unaffiliated insurers. The sales representatives, for example, conducted a “road show” at the AIG corporate dining room at 70 Pine Street for multinational companies with operations in Brazil. The Brazil “road show” was designed to generate new sales in the amount of $25 million, the DFS alleged.
The two former AIG subsidiaries at the heart of the dispute are American Life Insurance Company (ALICO) and Delaware American Life Insurance Company (DelAm). They were sold to MetLife in 2010 as part of the AIG divestitures required to pay off the federal government, which rescued it in 2008, and return to private control. MetLife and AIG announced the probe was under way in securities filings in November.
It also alleged that AIG sales representatives had incentive compensation plans that compensated them for placing business with DelAm and the foreign operations of ALICO and its subsidiaries and affiliates and other unaffiliated insurers.
In a Legal Alert at the time of settlement with MetLife, Shapiro voiced concern that the consent decree appears to hold MetLife and its subsidiaries to a higher standard than the law requires. “It is possible that without further clarification, the Consent Decree reflects that the DFS holds a much narrower view of what constitutes ‘back office’ activities than the insurance industry,” Shapiro said.
One of the implications is that other states might try to copycat New York if it is successful because U.S. insurers under pressure from investors to show growths, are more and more eyeing entering foreign markets aggressively. This is so for both property and casualty and life insurers.
In his Legal Alert at the time of the MetLife settlement and the AIG decision to sue, Shapiro said that, based on the Consent Decree and Deferred Prosecution Agreement, insurers not licensed to transact insurance in New York should review their and their agents’ activities to make certain they are not engaging in prohibited insurance solicitations in New York or in business activity that overly energetic government attorneys might mistakenly view as violating New York law.
“It is also worth noting that the DFS might have a much different idea of what type, if any, of penalty to assess if the amount of business written in New York by an unauthorized insurer were much smaller than the premiums written in the current case,” Shapiro said in the Legal Alert.
Commenting Monday, Shapiro cautioned insurers that “Lawsky is an incredibly aggressive insurance and banking regulator and I don’t think this settlement is going to deter him from continuing to be so.”
As for AIG, Shapiro said they likely settled because, “internally, with this case they have a lot of people distracted from what they should be doing.”
