AIG Insurer Loses Appeal Of $517 Million Judgment

Published: Mon 11 Jan 2010

Thomas Kristoffersen

A division of American International Group (AIG) has been ordered by an appellate court to pay reinsurance totaling more than $517 million to five California workers' compensation insurers that were liquidated in 2000.

The directive followed AIG's U.S. Life Insurance losing its challenge to the U.S. Court of Appeals in San Francisco. The life insurance company had challenged an arbitration award approved by a lower court in 2007.

U.S Life was the insurer for five workers' compensation units that been part of Superior National Insurance Group Inc., which had been the state's biggest private workers' compensation insurance company before it failed.

The AIG unit told the court that Superior National and its affiliates did not reveal all necessary information about their ability to pay claims, resulting in U.S. Life suffering losses, state Insurance Commissioner Steve Poizner said.

The California Insurance Guarantee Association, an independent pool that covers the claims of failed insurers, paid what was to be covered by Superior National. The failure of Superior National and resulting seizure was considered a major signal that the state's workers' compensation system had problems, prompting reforms to occur.

California Insurance Guarantee Association will get about 90 percent of the award. "Upholding this award means that hundreds of millions of dollars will be available to pay the claims of workers injured on the job through the California Guarantee Association and other guarantee associations," said Poizner.

U.S. Life has the right to request a review of the ruling or a hearing by the U.S. Supreme Court. There was no immediate comment from AIG, which many people still remember received from the federal government $182.3 billion in bailout money in 2008.

The California case preceded the bailout. In 2007 a federal court issued a $443.5 million judgment against U.S. Life when it challenged an arbitration award. That was appealed by the company.

The Court of Appeals said that despite the arbitration panel following a unique procedure by meeting with compensation experts it hired to help it determine the outcome, there was no violation of federal arbitration law and U.S Life received a fair hearing. The court let the earlier judgment stand.

However, the addition of interest pushed the original amount up to more than $517 million, Poizner said. After the amount is collected from the insurer or a $600 million security bond posted by AIG, once the world's largest insurer, the guarantee association will be repaid.