Reinsurers Sue AIG Alleging Claims Fraud; AIG Denies All Wrongdoing

A group of 18 insurers is suing American International Group and bankrupt fronting company Trenwick America Reinsurance Corp. for allegedly scheming to collect as much as $73 million in what the insurers claim are “grossly inflated” workers compensation and other reinsurance claims.

The suit alleges that only about $15 million of the $73 million in claims for which AIG has demanded payment appear to be legitimate paid losses eligible for reinsurance coverage. The remaining amount reflects “highly suspect” estimates of future (incurred but not reported) losses, according to the complaint, which was filed in Suffolk Superior Court in Boston on July 6.

AIG had originally demanded $130 million in payment with $116 of that labeled as projections of future claims.

In a statement to Insurance Journal, AIG denied any wrongdoing including allegations of fraud. The statement from spokesman Joe Norton referred to the matter as “a reinsurance collection dispute” that would “normally be handled in private arbitration.”

The plaintiff insurers are members of a reinsurance facility managed by LDG Facilities in Wakefield, Mass. LDG in turn hired Trenwick and its predecessor, Chartwell Reinsurance, to issue policies on behalf of the consortium and to verify and manage claims from insureds, including AIG.

According to plaintiffs, AIG’s claims figures were “highly suspicious” and defied actuarial sense. Also, AIG never provided satisfactory proof or explanations; instead AIG and Trenwick together engaged in a pattern of “evasive and obstructionist conduct” in response to attempts by LDG to obtain proof of losses, the complaint contends.

Plaintiffs maintain that AIG took advantage of Trenwick’s tenuous financial situation and manipulated Trenwick to participate in the scheme to pass through millions of dollars in claims to the reinsurers without verifying their legitimacy.

Trenwick acquired Chartwell in 2002. On August 20, 2003, Trenwick filed for Chapter 11 protection and seven days later, according to the plaintiffs, AIG exercised its option to demand arbitration with Trenwick to settle its claims. Later, AIG induced Trenwick into a settlement by offering the favorable promissory note financing, plaintiffs maintain.

The court documents allege that in exchange for agreeing to pass through the invalid claims to the reinsurers, AIG extended financing to Trenwick in the form of a promissory note with favorable terms for a financially strapped firm. This note made it appear Trenwick had commuted the claims as legitimate. AIG subsequently demanded that the reinsurers make good on that promissory note. Trenwick paid AIG $4 million in cash for the commutation agreement, a sum that Trenwick later demanded LDG pay back, the documents add.

The suit comes after years of arbitration and secret negotiations between AIG and Trenwick, according to the court papers.

AIG said that it commenced arbitration as called for under the reinsurance agreements. The insurer said it would respond to the complaint “in the appropriate forum at the appropriate time.”

AIG asserted its “right to recover funds from the reinsurance pools as the result of a negotiated agreement with Trenwick” and noted that the reinsurers have paid AIG nothing to date.

Among the AIG executives mentioned in the complaint as signing off on the commutation agreement is Christopher Milton, former vice president for reinsurance. Milton is no longer with AIG, having been was among the AIG employees fired for not cooperating with earlier investigations into various reinsurance transactions, according to the insurer.

The complaint charges AIG and Trenwick with fraud, civil conspiracy, aiding a breach of fiduciary duty among other charges. It also invokes Massachusetts law Chapter 93A, which awards treble damages, for unfair and deceptive practices.

Plaintiffs are asking for compensatory and punitive damages and an injunction against paying any of the AIG claims.

Among the insurers bringing the suit are First Allmerica, Dorinco, Hartford Life, HCC Holdings, John Hancock, Sun Life, Insurance of Hannover, Phoenix Life, Clarica and Swiss Re.