AIG Subsidiary Told to Reimburse California Guarantee Fund for $500M

Jesse Hamilton, Washington Bureau Manager
A.M. Best
January 7, 2010

PASADENA, Calif., Jan 07, 2010 (A. M. Best via COMTEX) -- A federal court is calling for U.S. Life Insurance Co., a subsidiary of American International Group Inc., to pay more than $500 million in a decade-old legal dispute.

In an arbitration matter with five workers' compensation insurers -- Superior National Insurance Co. and four affiliated companies that were liquidated in 2000 -- the 9th U.S. Circuit Court of Appeals has upheld a lesser court ruling that the five companies were entitled to a major payout of reinsurance. The five companies were liquidated by the state, having declared bankruptcy shortly after securing the reinsurance policies with U.S. Life.

U.S. Life had requested arbitration in 1999 and claimed that the insurers had acted in bad faith and failed to disclose pertinent information about the adequacy of their reserves. The arbitration panel had ruled against U.S. Life in 2007 -- though it did note Superior National's "failure to be forthright during the contract formation period" -- so U.S. Life sued to take the case to federal court, claiming the panel hadn't reviewed pertinent evidence about mishandling of claims.

While the court did call the arbitration panel's process "unusual," it "provided the parties with a fundamentally fair arbitration," the 9th Circuit ruling said. Though the original payout was to be $443 million in 2007, it has now risen above $517 million, according to the state's insurance department. U.S. Life had posted a $600 million bond as security during the legal dispute.

"This is huge and welcome news," said California Insurance Commissioner Steve Poizner, in a statement responding to the ruling. "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 Insurance Guarantee Association and other guarantee associations."

California's guarantee fund has paid the workers' comp claims in the years since the case began and is to be reimbursed by U.S. Life, Poizner's office said.

A spokesman for AIG, Mark Herr, said, "We're reviewing the 9th Circuit's decision and our possible responses to it."

U.S. Life is entitled to file a motion to reconsider, or even to attempt to get the case heard before the U.S. Supreme Court. But Poizner's office suggested further motions would have little chance of succeeding.

Besides Superior National, the four other companies listed in the suit were Superior Pacific Casualty Co., California Compensation Insurance Co., Commercial Compensation Insurance Co. and Combined Benefits Insurance Co.

The court's final opinion, written by Judge Edward F. Shea, was issued Jan. 4.

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