AIG Suit Says Ex-Cigna Unit Skirted State Law to Limit Loss

Insurer American International Group Inc., the largest U.S. insurer by market value, sued Cigna Corp. and a former unit, claiming they broke California law by establishing a separate division to limit losses from pollution and asbestos claims.

The unit, Insurance Company of North America, or INA, was sold by Cigna to Ace Ltd., a Bermuda-based insurer, in July for $3.45 billion. INA had transferred its policies into Century Indemnity Co., a part of the Brandywine Holdings Corp. that Ace also acquired.

AIG, which has a controlling interest in Woodland Hills-based 20th Century Industries, is asking a state court in San Francisco to hold INA responsible for the policies. The 20-page suit filed this week said INA has argued that it has no liability as a result of the transfer.

Yet Cigna didn’t get approval from California policyholders for the transfer, which was required by state law, according to AIG. “The restructuring of INA was, in fact, an elaborate shell game,” the suit charged.

AIG general counsel Ernest Patrikis said he’s unaware of any loss AIG might suffer if Brandywine runs out of money to pay claims.

Cigna spokesman Wendell Potter dismissed questions on the suit, which he said Cigna lawyers haven’t seen. Ace spokeswoman Wendy Davis Johnson declined to comment for the same reason.

AIG said it’s coming to the aid of policyholders who’ve been forced to accept policies with lower credit ratings. That means they might have a harder time collecting on claims than owners of the policies INA still stands behind.

Another problem is that a state guarantee fund won’t back up the policies, according to AIG. That’s because the fund only protects policies when companies that originally issue them become insolvent. State guarantee funds, funded by the insurance industry, could be forced to pay if companies go insolvent.

Other insurers might be at risk to worsening results at the former Cigna subsidiary. National Indemnity Co., a unit of Berkshire Hathaway Inc., agreed early last year to provide $1.25 billion of insurance to cover worse-than-expected losses on the Brandywine business.

Regulators in Pennsylvania, where Cigna is based, approved the Brandywine restructuring plan in February 1996, and their actions were upheld by the Pennsylvania Supreme Court this July.

In New York Stock Exchange trading, AIG was unchanged at $108.31; Ace fell 56 cents to close at $16.19 and Cigna advanced $1.31 to close at $79.94.