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AIG Eludes $34.4 Million Judgment in Court Decision

Source: Business Insurance

Posted on 24 Aug 2010

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American International Group Inc. got a break via a federal appellate court decision to vacate a $34.4 million judgment against the insurer. Regarding the judgment against AIG, in which a jury was awarded the milions to Paris-based AXA S.A., the court held that AXA's charges were fraud-related and therefore the statute of limitations had expired.

Court documents show that two years earlier, a jury held AIG liable for $34.4 million (including $5.8 million in punitive damages) citing "fraudulent inducement" with respect to two 1997 and 1998 reinsurance facilities AIG had agreed to with AXA as the reinsurer. The 2nd U.S. Circuit Court of Appeals in New York upheld a lower court decision and vacated that award.

According to an underlying decision in the case, AXA's charges related to whether the risks involved were facultative or facultative obligatory. Facultative reinsurance contracts give the primary insurer discretion to propose which risks to cede to the reinsurer but give the reinsurer discretion to accept or decline each risk as it sees fit.

Facultative obligatory reinsurance contracts permit the primary insurer to select which risks to cede only within a defined class of risk, but the reinsurer is then required to accept each such ceded risk.

AXA charged that AIG's brokers had falsely represented that the facilities would be facultative obligatory, “whereas in fact it was AIG's intent from the outset to treat them as facultative and thereby pawn off on AXA inferior policies that AIG knew AXA was in no position to evaluate.”

The appellate court decision says fraud was involved because “AIG misrepresented that it would treat the facilities as facultative obligatory, that it would cede a reasonable cross-section of risks (which a facultative obligatory contract implicitly requires) and that AXA's share of the primary layer risks would be calculated as a percentage of AIG's share of risks, when in fact, AIG did not intend to retain any primary layer risks. These alleged misrepresentations were essential to induce AXA to enter into the reinsurance contracts.”

Accordingly, says the decision, “we agree with the District Court that all of AXA's allegations sound in fraud.”

The decision goes on to say AXA, which filed its initial complaint in 2005, should have been aware of the fraud before expiration of the statute of limitations. Under New York law, fraud claims must be filed within six years of the fraud's commission or within two years from the date was discovered or could reasonably have been discovered, whichever is later.

"We hold that AXA was confronted with a clear ‘storm warning' in August 1998, as well as additional facts through 2000” to suggest it had been defrauded, said the opinion. The case was remanded to a lower court for a judgment in AIG's favor.

Spokesmen for AIG and AXA had no comment.