3. AIG

3. AIG

CEO: Robert Willumstand (former CEO Martin J. Sullivan was fired in June 2008, and is expected to receive as much as $68 million, despite leading AIG to record losses over his three-year tenure—2007 compensation $14.3 million)

HQ: New York, NY

Profits: $6.2 billion (2007)

Assets: $1.06 trillion (48)

The world’s biggest insurer, AIG has a long history of claims-handling abuses for both individuals and business clients. AIG executives have also come under fire for opportunistically seeking price increases during catastrophes. Now the company has been labeled “ the new Enron” because of charges of multi-billion dollar corporate fraud.
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AIG has long had a reputation for claims-handling abuses. Part of the reason for that reputation is AIG’s reliance on underwriting results. Nearly every other insurance company relies on the income it makes from investing its policyholders’ premiums. AIG has always focused on turning a profit on underwriting—in other words, taking in more money in premiums than it pays out in claims. To do that, the company had had to be extremely parsimonious about the claims it pays. Former AIG claims supervisors have alleged in litigation that the company used all manner of tricks to deny or delay claims, including locking checks in a safe until claimants complained, delaying payment of attorney fees until they were a year old, disposing of important correspondence during routine “pizza parties,” and routinely fighting claimants for years in court over mundane claims.

In 1999, after discovering AIG was losing as much as $210 million on auto-warranty claims, CEO Greenberg installed a new team that began to systematically reject thousands of claims, even when its own claims-handling contractor recommended they be paid. Richard John , Jr., a vice-president at the contractor, would testified that the company used any excuse to deny a claim, including ruling that installing manufacturer-approved tires was a “modification” that invalidated the warranty.

After an AIG-insured Safeway burned down in Richmond, Virginia, the supermarket was confronted with damage claims from nearby residents who had been affected by the fire. AIG denied the claims saying that the damage was caused not by fire but by smoke, which qualified as a form of air pollution and as such was not covered. In fact, in a series of high profile cases, AIG or its subsidiaries fought claims on tenuous bases, building its reputation as one of the most aggressive claims fighters in the industry .

In 2005, AIG was sanctioned by a federal judge in Indianapolis for attempting to unfairly block discovery in an environmental case. AIG’s lawyers went so far as to give instructions not to answer 539 times during one deposition of an AIG executive. In January 2008, AIG agreed to pay $12.5 million to several states after state insurance commissioners found that the company had conspired with other insurance brokers to submit fake bids in order to create an illusion of a competitive bidding process in commercial insurance markets. Businesses and local governments ended up paying artificially inflated insurance rates. Even other insurance companies got the treatment. In 2007, an AIG reinsurance unit was forced by an arbitrator to pay more than $440 million to five insurance companies who alleged the AIG unit tried to rescind their contract when it was time to pay, and then continued to refuse payment even after several courts had ruled against rescission.

AIG is not alone in using strategies such as deny-delay defend to enhance its bottom line at their customers’ expense. What sets AIG apart, however, is the way it has no callously sought to take advantage of its policyholders’ misfortunes.
In 1992, on the day Hurricane Andrew landed in Florida, AIG Executive Vice-President J.W. Greenberg, son of then-CEO Maurice Greenberg, sent a company-wide memo saying, “We have opportunities from this and everyone must probe with brokers and clients. Begin by calling your underwriters together and explaining the significance of the hurricane. This is an opportunity to get price increase now. We must be the first and it begins by establishing the psychology with our own people. Please get it moving today.”

Similarly, the September 11th terrorist attack were to most people a terrible tragedy. To Maurice Greenberg, the “opportunities for his 82-year-old company have never been greater.” In the immediate aftermath of the attacks, prices for insurance soared by what Greenberg described as “leaps and bounds.” “It’s global opportunity,” the CEO said at the time. “It’s not just in the United States, but rates are rising throughout the world. So our business looks quite good forward.” Greenberg also said of the increased awareness of the need for insurance that the attacks prompted, “AIG is well positioned—probably as well as it’s ever been in this marketplace.”

AIG executives are unapologetic about their reputation for opportunism. “We’ve always been opportunistic. When we see opportunities, we will never change. At AIG it’s part of our culture.”

AIG ‘s opportunism has also crossed the line into fraud. According to the Federal Bureau of Investigation (FBI), insurance fraud totals more than $40 billion and costs the average family as much as $700 per year. However, while the insurance industry only talks about fraud committed by its policyholders, what interests the FBI is the increase in corporate fraud by the insurance companies themselves, leading the agency to establish it as one of its top investigative priorities. No company is a better example of this kind of fraud than AIG.

In 2006, AIG paid $1.6 billion to settle charges of a variety of financial shenanigans that had commentators describing AIG as “the new Enron.” Two years later, five insurance executives were found guilty of fraud.

The fraud accusations were traced back to longtime CEO Maurice Greenberg, who was ousted from the company he had led for 38 years. Greenberg was identified by prosecutors as an “unindicted co-conspirator,” and notified that the Securities and Exchange Commission, which had already fined the company $126 million, was likely to pursue civil charges against him for two separate incidences of fraud. AIG was also fined millions of dollars by state insurance regulators, and faces charges that they bilked pension funds out of billions of dollars.

But that was not the end of the AIG fraud saga. Greenberg, who once described civil justice attorneys as “terrorists,” launched an epic battle of lawsuits and countersuits with his former company. Suddenly, the $1.6 billion AIG paid to settle claims of fraud seemed to pale in comparison to the charges being exchanged between those who knew better than anyone the true extent of the fraud. AIG now claims Greenberg “misappropriated” $20 billion, and Greenberg in turn says AIG concealed $4 billion in losses.

In 2006, AIG was implicated in the manipulation of local government bond issue. At least $7 billion worth of “phantom bonds,” which were intended to aid the poor and supply computers to inner city schools, have instead only benefited companies such as AIG. In one such “phantom bonds” case in Florida, an AIG unit conspired with other financial services firms to extract fees from a $220 million bond issue that was intended to promote affordable housing for low income families. Unbeknownst to the local government agency involved, AIG’s deal meant the less money that actually went to affordable housing, the more AIG and its fellow companies would make. AIG and its co-conspirators eventually took $12 million fees. Not a penny went to the affordable housing. The deal also violated U.S. tax laws, which would eventually force AIG to settle with the IRS. AIG was involved in similar deals in Georgia, Oklahoma, and Tennessee.