California: AIG liable for more than $500 million in reinsurance

A California appeals court recently upheld an arbitration award against American International Group, requiring the insurance giant to pay more than $500 in workers' compensation reinsurance coverage and interest.

In 2007, the U.S. District Court, Central District of California entered an original judgment against U.S. Life Insurance Co. -- a subsidiary of AIG -- for more than $443 million. U.S. Life was a reinsurer for five workers' comp insurance companies in the state that were liquidated in 2000.

U.S. Life subsequently appealed to the 9th U.S. Circuit Court of Appeals. The company argued that Superior National Insurance Companies -- workers' comp insurer in liquidation -- and its affiliates failed to disclose to U.S. Life all pertinent information regarding the adequacy of its outstanding reserves for payment of claims, and exposing U.S. Life to substantial losses. However, 14 months after arguments were heard and the case submitted, the original judgment was unanimously upheld by a three-judge panel.

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California Insurance Commissioner Steve Poizner hailed the decision.

"This is huge and welcome news," he said. "Upholding this award means that 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."

Poizner said that at no time were people in the workers' comp system at risk of not being paid. CIGA, he said, has been paying the claims of injured workers whose policies were reinsured by U.S. Life. Once the money is collected from U.S. Life or from the $600 million bond AIG posted as security, Poizner said it will be distributed to CIGA and other guaranty associations. CIGA will receive about 90 percent of the final amount. Including interest, the judgment now stands at more than $517 million. U.S. District Judge Edward F. Shea, who wrote the opinion, said interest will continue to accrue until payment is received from U.S. Life.

Although the court upheld the judgment, U.S. Life still may seek to file a motion to reconsider or request a hearing en banc. The company can also file a motion within 90 days of the judgment being affirmed to seek review by the U.S. Supreme Court. Given that the appeal relates to the affirmation of an arbitration award, Poizner said it is not expected that the court will grant further review.

Read more at the WORKERSCOMP Forum^TM homepage.

February 1, 2010

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