AIG's Other Reputation

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By Dean Starkman
Washington Post Staff Writer
Sunday, August 21, 2005

When his pickup truck developed engine trouble a few years ago, Anthony A. Stankus filed a claim under an auto warranty he had bought from a unit of insurance giant American International Group Inc.

Soon the Phoenix consultant got his answer: Claim denied.

Most policyholders would have left it at that. But Stankus sued -- and won a rare look at the internal claims-handling practices at the world's largest insurance company.

As it turns out, AIG was losing more than $210 million on auto-warranty claims, provoking the ire of the company's longtime chairman and chief executive, Maurice R. "Hank" Greenberg, according to court documents. As a result, in mid-1999, a newly installed team at AIG's auto-warranty division began to reject thousands of claims -- including half of the claims that its own contractor, a claims-handling company, recommended be paid, according to court papers. Stankus's claim was among them.

Any modification to a car could be used as a reason to reject, Richard John Jr., a former senior vice president of the claims-handling company, Mechanical Breakdown Administrators Inc. of Scottsdale, Ariz., testified -- even installing manufacturer-approved new tires or, in Stankus's case, a trailer hitch. When John protested, he said an AIG official told him, " 'We are losing X number of million dollars a year on these programs, and we've got to do something.' "

AIG has declined to discuss individual lawsuits. But Charles R. Schader, AIG's senior vice president for claims, said the company never denies claims to boost profitability. He said that -- allowing for an occasional mistake -- AIG pays legitimate claims promptly and gets few complaints.

"If we didn't pay claims, including the large ones, we'd be out of business," Schader said.

These days AIG is on the defensive. New York Attorney General Eliot L. Spitzer has accused the New York insurance behemoth, Greenberg and another top former official of engaging in a "pattern of fraud" against investors and regulators since at least the 1980s, concocting sham transactions to falsely boost reserves, hiding control of offshore insurance companies, disguising underwriting losses as investment losses and more.

Federal prosecutors, meanwhile, are probing whether AIG and other insurers misused a specialized financial product that makes public companies' books look better -- all to fool investors.

But the loudest complaints about AIG over the years have come not from investors but from AIG customers. Consumer advocates, former customers and their lawyers gripe that AIG has routinely flouted its obligations under state insurance laws to pay legitimate claims promptly and has abused the legal system in fights with customers who sue.

Metro-Goldwyn-Mayer Studios Inc., for instance, accused an AIG unit of "pulling the rug" out from under a policy to defend the studio against lawsuits on the eve of a critical trial over ownership of the James Bond movie franchise. The two sides settled at the end of 2002 after a California state court judge found that the AIG unit had wrongfully dropped the coverage.

Eugene R. Anderson, a New York policyholders' lawyer and longtime AIG nemesis, says the company's business strategy is simple: "Just say no."


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© 2005 The Washington Post Company

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