A unit of New York-based insurer AIG is engaged in litigation with Pennsylvania-based Coventry First over thousands of life assurance policies sold by the holders of the policies to free up cash.
Lavastone Capital, a unit of AIG, alleges that it paid Coventry First more than $1bn in fees from 2006 on to help it acquire the policies. The acquiring business continues the payments on the policies until the policyholder dies, collecting the difference between what the policyholder was paid and the amount eventually received from the life assurer.
Lavastone claims that Coventry used a network of shell companies to move the policies, and that this inflated the prices paid by Lavastone. The AIG unit claims that this fraud cost Lavastone in excess of $150m. The lawsuit claims that Coventry First and its chief executive Alan Buerger had acted in the manner of an auction house that used fake bidders to push the price up to the maximum that a known bidder was willing to pay. Lavastone says that it provided Coventry with confidential pricing information and that Coventry's strategy constituted an "illegal enterprise".
Coventry First has countersued, claiming that Lavastone is guilty of breach of contract, and that the AIG unit has put together a raft of false allegations in order to escape contractual provisions that limit its ability to resell certain policies. Coventry alleges that Lavastone bought policies via a programme that insured lender that financed the purchase of life assurance. An affiliate of Lavastone took possession of the policies if the borrowers defaulted.
Coventry estimates that this could lose AIG $700m, and that the legal action was a play by AIG "to get leverage" on the provisions of the contract.
The Lavastone Case is in the US District Court, Southern District of New York. The Coventry First countersuit is in the Supreme Court of the State of New York.