Insurers' troubles typically start when exposure that was of no concern years ago becomes overwhelming and daunting. That's especially true when no one is minding the store. AIG has had five CEO's in the past four years, all of whom had more on their minds than the multitude of divisions, subsidiaries and units that have all operated almost independently across six continents.
Yesterday two of those exposures came back to haunt the insurer. California Insurance Commissioner Steve Poizner announced that a U.S. Appeals Court upheld an arbitration award requiring U.S. Life Insurance to pay reinsurance of more than $500 million to a bankrupt California workers' compensation insurer. As you might surmise, U.S. Life is an AIG subsidiary.
What's interesting is the somewhat cavalier attitude by AIG that led to this decision. AIG insured the company and then remained in a bad situation while the company was liquidated nearly 10 years ago. Instead of paying off then, AIG chose to play hardball. AIG went to court, claiming that the company failed to disclose pertinent information, thereby violating the terms of its contract.
AIG lost in district court and has now lost the appeal. In his press release Poizner says that AIG can appeal again, but the meter keeps running and the interest keeps growing. What once was a $443 million judgment is now $517 million, and climbing. Predictably, AIG had no comment, according to Bloomberg News.
That brings us to the Chinese drywall case, an issue that's been making news as Gulf Coast homes start to smell and fall apart from this inferior product. A trust set up by victims is suing the 14 insurers of a bankrupt home builder who used this defective material for $200 million. Included in the suit are American International Specialty Lines and Lexington, both AIG units. No comment from AIG, according to The Florida Sun-Sentinel.
AIG will probably survive these and the other suits to come. After all, it has deep pockets: the good faith and credit of the U.S. Treasury. But it makes you wonder: how many other unexploded legal landmines are out there?