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National Council on Compensation Insurance, Inc. v. American International Group

February 23, 2009


The opinion of the court was delivered by: Judge Robert W. Gettleman


Plaintiff National Council on Compensation Insurance, Inc. ("NCCI"), solely as attorney-in-fact for the participating companies of the National Workers Compensation Reinsurance Pool ("the Pool"),*fn1 has brought an eight-count complaint against defendants American International Group, Inc. ("AIG Inc.") and its affiliates and subsidiaries, AIG Casualty Company f/k/a Birmingham Fire Insurance Company of Pennsylvania, AIU Insurance Company, American Home Assurance Company, American International Pacific Insurance Company f/k/a American Fidelity Company, American International South Insurance Company f/k/a American Global Insurance Company, American International Specialty Lines Insurance Company f/k/a Alaska Insurance Company, Commerce and Industry Insurance Company, Inc., Granite State Insurance Company, Illinois National Insurance Company, Insurance Company of the State of Pennsylvania, National Union Fire Insurance Company of Pittsburgh, New Hampshire Indemnity Company, and New Hampshire Insurance Company (collectively "AIG").

The complaint alleges: violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1962(c) and (d) ("RICO") (Counts I and II); fraud (Count III); accounting (Count IV); action on an open, current and mutual account (Count V); breach of contract (Count VI); promissory estoppel (Count VII); and unjust enrichment (Count VIII). All of the counts of the complaint are based on alleged intentional fraudulent conduct by defendants. In the answer to the AIG has raised twelve affirmative defenses: "Statute of Limitations;" "Laches;" "Unclean Hands;" "Attorney's Fees Unwarranted;" "Standing;" "Parens Patriae;" "In Pari Delicto;" "Estoppel;" "Contributory Wrongful Conduct;" "Failure to Mitigate Damages;" "Payment;" and "Setoff."*fn2 AIG has also filed counterclaims for an equitable accounting and an action on an open, current, and mutual account. Additionally, AIG has filed a third-party complaint against twenty-four named companies and numerous unnamed companies. Claims I through V of the counterclaim are directed against ACE INA Holdings, Inc. ("Ace"), Advantage Workers Compensation Insurance Company ("Advantage"), Alaska National Insurance Company ("Alaska"), Amtrust Group ("Amtrust"), Berkley Risk Administrators Co. LLC ("Berkley"), Chubb Group Insurance Companies ("Chubb"), Cincinnati Insurance Company ("Cincinnati"), Companion Property & Casualty Insurance Company ("Companion"), The Covenant Group ("Covenant"), Crum & Forster, Guard Insurance Company (Guard"), General Casualty Insurance Companies ("General Casualty"), Hanover Insurance Group ("Hanover"), Harleysville Insurance Group ("Harleysville"), The Hartford Financial Services Group, Inc. ("The Hartford"), Liberty Mutual Group ("Liberty Mutual"), Memic Indemnity Company ("Memic"), Safeco Corp ("Safeco"), Travelers Insurance Group ("Travelers"), Truck Insurance Group ("Truck"), Utica National Insurance Co. ("Utica"), Aetna, Inc. ("Aetna"), CIGNA Group, Inc. ("CIGNA"), Sentry Insurance Group ("Sentry"), and Doe Corporations 1-50.*fn3 Claims VI through XII are directed against defendant Liberty Mutual, Travelers, The Hartford, Aetna, Ace, CIGNA, Sentry, and Does Corporations 1-50, collectively referred to as the "Underreporting Participating Companies."

The third party complaint alleges: violations of RICO, 18 U.S.C. §§ 1962(c) and (d) (Claims 1 and 2); civil conspiracy (Claim 3); fraud (Claim 4); breach of fiduciary duty (Claim 5); fraud - premium underreporting (Claim 6); fraud - Workers Compensation Fund (Claim 7); negligent misrepresentation (Claim 8); breach of contract (Claim 9); contribution (Claim 10); unjust enrichment (Claim 11); and equitable accounting (Claim 12).*fn4

Plaintiff has filed a motion to strike all twelve affirmative defenses pursuant to Fed. R. Civ. P. 12(f) and a motion to dismiss the counterclaims pursuant to Fed. R. Civ. P. 12(b). In addition, NCCI has filed a separate motion to dismiss the counterclaims. Finally, the third-party defendants have filed a motion to dismiss the third-party complaint pursuant to Fed. R. Civ. P. 12(b) and 20(a). For the reasons explained below, the motions are granted in part and denied in part.


All states require employers to provide workers compensation insurance for their employees. Most employers find insurers willing to provide them with coverage; these employers participate in what is known as the "voluntary market" for workers compensation insurance. Insurers that provide coverage to the voluntary market are also required to provide coverage to the "residual market" -- the market for employers who cannot obtain coverage on the voluntary market -- through a state's assigned risk plan. Under that plan, the amount of insurance an insurer is required to provide to the residual market is directly proportional to the amount of premiums it collects for the policies it writes for the voluntary market.

The National Workers' Compensation Reinsurance Pool ("the Pool") is an unincorporated association active in more than forty states. Established in 1970, the Pool provides insurance companies with a means of complying with their residual market requirements. The Pool is organized and governed by the Articles of Agreement, a contract to which all participating insurers ("Participating Companies") have agreed and are signatories.

Plaintiff NCCI is the administrator of the Pool, as well as the attorney-in-fact for the Pool. NCCI assigns each Participating Company specific employers to which they must provide insurance coverage. The Participating Companies each provide annual certified financial reports to NCCI who uses the data to calculate each company's "reinsurance participation rate" which reflects a company's proportional share of the residual market. A company's annual reinsurance participation rate is the ratio of the amount of voluntary market workers compensation premiums billed by that company (numerator) to the total amount of workers compensation premiums billed in the voluntary market by all Participating Companies (denominator). Consequently, any company that underreports its premiums to NCCI decreases its reinsurance participation rate and the overall total used to calculate all the rates.

In 2005 a New York state investigation revealed that AIG had, over several decades, provided false reports of its workers compensation premiums to NCCI and state tax authorities to evade its residual market obligations. The investigation found that AIG: (1) filed inaccurate responses to financial data calls, statistical reports, and other financial reports; (2) booked certain workers compensation premiums as reinsurance assumed premiums; (3) booked certain workers compensation premiums as general liability premiums; and (4) used unapproved policy forms. AIG's underreporting reduced its share of responsibility in the residual market and increased the liability of other insurers participating in the Pool.

The 2005 investigation also revealed that the false reporting scheme had been the subject of a 1991-92 internal investigation led by AIG Inc.'s senior legal officer. That investigation resulted in a formal report acknowledging AIG's unlawful conduct and determining that the unreported workers compensation premium totaled $300-400 million annually and gave AIG "an unlawful benefit in the range of $60-80 million or more annually." The report admitted that AIG's reporting practices were unlawful and exposed them to civil liability and potential criminal prosecution. According to plaintiff, AIG officials destroyed evidence and relevant records after reading the report and did not disclose the information to other insurance companies and have continued to file false financial reports.

In 2006 AIG entered into settlement agreements with several enforcement authorities. As part of a $1.6 billion settlement with New York and federal authorities, AIG paid $100 million to the state of New York and approximately $42 million to various states. AIG also agreed to pay at least $301 million to victims of its false workers compensation premium reporting through a fully funded settlement fund ("the Workers' Compensation Fund" or "the Fund"). Pursuant to an agreement, the Fund is to be distributed in three stages. Before September 1, 2007, a participating state (as defined in the agreement) can recover by tendering a release to AIG for all claims that state's residual market pool may have related to AIG's underreporting. Between September 2, 2007, and October 31, 2009, AIG can use the fund to settle claims directly with affected parties. After November 1, 2009, remaining funds will be distributed on a pro rata basis to the participating states. No portion of the Fund can revert to AIG.

The Participating Companies did not believe that the settlement agreements entered into by AIG offered full and fair restitution. According to NCCI, total damages exceed $1 billion. For that reason, the Pool has refused to allow any state to tender a release on its behalf, which precludes those states from participating in the settlement fund. On May 24, 2007, upon the expiration of a "stand still" agreement between the parties (during which they exchanged information regarding the settlement fund), AIG filed suit in New York State Supreme Court against the Pool and NCCI as its attorney-in-fact. That action seeks: (1) a declaration of the liability defendant AIG has to the Pool as a result of its underreporting; (2) a declaration that recovery from the settlement fund is the Pool's sole remedy for defendants' underreporting; and (3) an order requiring the Pool to permit the states within which it operates to participate in the settlement fund. Within hours of the filing of the New York suit, plaintiff filed the instant suit.

Specific to the instant motions, plaintiff alleges that from 1970 to 2005, AIG Inc. and several AIG Inc. executives engaged in a pattern of racketeering activity by agreeing to operate and actually operating an enterprise consisting of AIG Inc. and the related AIG Companies by repeatedly committing mail fraud in connection with the insurance underreporting discussed above. According to plaintiff, AIG Inc. and certain of the AIG Companies engaged in eight racketeering acts by mailing fraudulent annual reports of workers compensation premiums to NCCI on eight occasions from February 1974 through March 2006. Plaintiff also alleges that AIG Inc. and several of its executives agreed to commit at least two acts of mail fraud to further the insurance underreporting.

The counterclaim and third party complaint are based on the AIG's allegations that there was widespread underreporting of workers' compensation premiums by Participating Companies and, beginning in 2005, the Board of Directors of the Pool (the "Pool Board") conspired to conceal this underreporting to exploit the regulatory inquiry into AIG's business practices. AIG alleges that upon the direction of the Pool Board, NCCI knowingly issued false invoices to the Participating Companies based on the fraudulent underreporting, collected payment on these invoices, and suppressed any investigation into the underreporting. Additionally, according to AIG, the Pool Board members blocked any states or the Pool from making claims against the Fund, effectively preventing the Fund from fulfilling its purpose.


Motion to Strike Affirmative Defenses

Motions to strike affirmative defenses are generally disfavored in this circuit because often times they are employed for the sole purpose of causing delay. See Heller Fin., Inc. v. Midwhey Powder Co. Inc., 883 F.2d 1286, 1294 (7th Cir. 1989). Such motions will not be granted "unless it appears to a certainty that plaintiffs would succeed despite any state of facts which could be proved in support of the defense and are inferable from the pleadings." Williams v. Jader Fuel Co., 944 F.2d 1388, 1400 (7th Cir. 1991) (internal citations and quotation marks omitted).

It is appropriate for the court to strike affirmative defenses that add unnecessary clutter to a case. See Household Fin. Serv., Inc. v. Northeastern Mortgage Inv. Corp., 2000 WL 816795, at *1 (N.D. Ill. June 22, 2000) (citing Heller, 883 F.2d at 1295). It is also true that because affirmative defenses are subject to the pleading requirements of the Federal Rules of Civil Procedure, they must set forth a "short and plain statement" of all the material elements of the defense asserted; bare legal conclusions are not sufficient. See Heller, 883 F.2d at 1294; Fed. R. Civ. P. 8(a); Renalds v. S.R.G. Restaurant Group, 119 F. Supp. 2d 800, 802 (N.D. Ill. 2000).

All of this boils down to a three-part test that is applied to affirmative defenses subject to a motion strike:

(1) the matter must be properly pleaded as an affirmative defense; (2) the matter must be adequately pleaded under the requirements of Federal Rules of Civil Procedure 8 and 9; and (3) the matter must withstand a Rule 12(b)(6) challenge --in other words, if it is impossible for defendants to prove a set of facts in support of the affirmative defense that would defeat the complaint, the matter must be stricken as legally insufficient.

Renalds, 119 F. Supp. 2d at 802-03 (citing Heller, 883 F.2d at 1294).

Plaintiff's motion to strike AIG's affirmative defenses raises three main arguments. First, plaintiff argues that three of AIG's affirmative defenses are improperly pled as affirmative defenses. Second, plaintiff argues that AIG has not adequately pled several of its other affirmative defenses under Fed. R. Civ. P. 8 and 9. Third, plaintiff argues that AIG's remaining affirmative defenses do not withstand challenge under Fed. R. Civ. P. 12(b)(6).

I. Plaintiff's Improper Pleading Argument

Plaintiff argues that AIG has not properly pled contributory wrongful conduct and setoff as affirmative defenses because they are not recognized by courts as such. AIG contends that both contributory wrongful conduct and setoff are properly raised because they are relevant to the proper allocation of loss among the parties.

An affirmative defense is a "reason[] why defendants are not liable even if they admit the facts alleged in the complaint." Native American Arts, Inc. v. The Waldron Corp., 253 F. Supp. 2d 1041, 1045 (N.D. Ill. 2003). Federal Rule of Civil Procedure 8(c) provides a non-exhaustive list of possible affirmative defenses a party can assert in a responsive pleading. The list includes: accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, and waiver. Fed. R. Civ. P. 8(c). If an affirmative defense is not named in Rule 8(c), "courts must analyze whether they are affirmative defenses." Native American Arts, 253 F. Supp 2d at 1045.

Contributory Wrongful Conduct

AIG's affirmative defense of "contributory wrongful conduct" states: "Plaintiffs' claims . . . are barred based on Plaintiffs' own contributory wrongful conduct, because certain Participating Companies engaged in conduct that had the intent and/or effect of improperly reducing their residual market obligations." Plaintiff argues that this affirmative defense should be stricken because there is no precedent for such an affirmative defense in federal case law.

Further, plaintiff argues that even if AIG intended "contributory wrongful conduct" to function as an affirmative defense of "contributory negligence," it is still not a viable defense because the complaint alleges fraud-based claims, "intentional torts ... to which comparative fault is not a defense." See Casio Computer Co., Ltd. v. Noren, No. 01-3250, 2002 WL 552350, *3 (7th Cir. 2002). Finally, plaintiff argues that the affirmative defense as pled does not provide proper notice of the elements of the claim.

AIG counters that it has made particularized allegations that fairly place plaintiff on notice as to the nature of the defense. Specifically, AIG's allegations include: (a) reporting workers compensation premium under different lines; (b) failing to account for residual market expenses as premium; (c) failing to conduct timely premium adjustments; (d) suppressing payroll for premium audits; and (e) masking workers compensation premium as negative dividend payments. AIG further argues that Illinois law permits an affirmative defense of comparative fault where a plaintiff's contributory negligence can be compared to the defendant's willful and wanton misconduct. Finally, AIG argues that plaintiff has failed to establish that there is no set of facts under which contributory wrongful conduct could be sustained, or that its presence as an affirmative defense will unfairly prejudice plaintiff.

"Contributory wrongful conduct" is not among the affirmative defenses listed in Fed. R. Civ. P. 8(c), nor is there any precedent for this defense. AIG attempts to substitute the affirmative defense of comparative fault for "contributory wrongful conduct," but does not plead the necessary elements of this defense. Further, even if this court were to allow AIG to make such a substitution, AIG has failed to allege that plaintiff engaged in conduct that would rise to the level of misconduct necessary to "cancel out" the intentional fraud alleged in the complaint.

See Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1048 (7th Cir. 1977) (finding that in securities fraud case, a plaintiff's contributory fault may "cancel out wanton or intentional fraud . . . [if it is] . . . gross conduct somewhat comparable to that of defendant." [internal citations omitted]); see also Poole v. City of Rolling Meadows, 167 Ill. 2d 41 (1995) (holding that "a Plaintiffs' contributory negligence may be compared to a defendant's willful and wanton misconduct, if that willful and wanton misconduct was committed recklessly, rather than intentionally."). All that AIG provides in its answer are general allegations of underreporting rather than fraudulent or other wanton or intentional fraud. These claims are vague as to which participating companies committed which acts and how these acts are attributable to plaintiff. Therefore, AIG's affirmative defense of "contributory wrongful misconduct" is stricken.


Plaintiff argues that AIG's affirmative defense of setoff should be stricken because, (1) the majority of courts do not recognize setoff as an affirmative defense, and (2) the setoff alleged arises from "a transaction different from that giving rise to plaintiff's claim." Cipa Mfg. Corp. v. Allied Golf Corp., No. 94 C 6574, 1995 WL 337022, *2 (N.D. Ill. May 24, 1995). AIG counters that courts do recognize setoff as an affirmative defense and that AIG is entitled to offset from the damages they may owe plaintiff the harm that plaintiff (including the Pool members) have caused by "improperly reducing their residual market obligations."

Where setoff does not destroy a plaintiff's cause of action, a claim for setoff is not an affirmative defense. Cipa Mfg. Corp., 1995 WL 337022 at *1-2. Further, setoff is not properly pled as an affirmative defense where the setoff alleged arises out of a transaction separate from that raised in the plaintiff's cause of action, potentially reducing recovery rather than eliminating the liability altogether. Id. This type of setoff claim is "properly characterized as a permissive counterclaim under Federal Rule of Civil Procedure 13(b)." Id. (holding that a permissive counterclaim arises from a different transaction than the main claim); Coplay Cement Co. Inc. v. Willis & Paul Group, 983 F.2d 1435, 1441 (7th Cir. 1993) (holding that a permissive counterclaim arises from a different transaction from the main claim, and a setoff, is a subset of the permissive counterclaim.).

In the instant case, AIG has alleged that the Pool members reduced their share of the residual market obligations through a variety of reporting and accounting failures. Though this conduct is similar to the underreporting alleged by plaintiff in its complaint, it apparently arises from wholly separate transactions. Therefore, AIG's affirmative defense of setoff is stricken, with leave to file a permissive counterclaim alleging this claim in sufficient detail.

II. Plaintiff's Inadequate Pleading Argument

Plaintiff argues that several of AIG's affirmative defenses must be stricken because they are not adequately pled under the requirements of Fed. R. Civ. P. 8 and 9(b). Rule 8 requires that "the party raising the affirmative defense provide enough facts to place its opponent on notice of the events on which the claim is based." Fed. R. Civ. P. 8. Rule 9(b) requires that in alleging fraud or mistake, "a party must state with particularity the circumstances constituting fraud or mistake." Fed. R. Civ. P. 9(b).

Statute of Limitations & Laches

NCCI moves to strike AIG's statute of limitations defense and laches defense because they fail to provide fair notice under Fed. R. Civ. P. 8. AIG's statute of limitations defense states that the complaint "is barred because Plaintiffs have failed to file their claims within the applicable statute of limitations." AIG does not provide any factual predicate for asserting this defense either in the "General Allegations" preceding the affirmative defenses, or in the text of the defense ...

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