New York Attorney General Eliot Spitzer has started a legal battle with Coventry First L.L.C.

Spitzer has filed a civil suit in a state court in New York that accuses Coventry, Fort Washington, Pa., of paying life settlement brokers secret “co-brokering” fees to suppress competitive bids.

Payment of undisclosed co-brokering fees is wrong, because the brokers are supposed to be representing the interests of the policy owners who are selling the policies, Spitzer says.

Spitzer is seeking injunctive relief from the court, restitution and damages, and he says he has copies of electronic mail messages and other evidence showing that life settlement industry executives were aware of illegal conduct.

One example Spitzer cites involved a 79-year-old widower living in Hawaii who was selling a $400,000 policy. Copies of electronic mail show that a senior Coventry executive knew that a broker was “sitting on” a competing offer for the policy, Spitzer says.

Coventry also encourages brokers to take “gross offers,” or offers that “provided a separate financial incentive for brokers to convince their clients to take as little as possible for their insurance policies,” according to officials in Spitzer’s office.

In at least 200 cases, brokers received undisclosed commissions equal to 50% or more of what the seller received, officials say.

Coventry First has fired back with a statement contending that it has been one of the leaders in efforts to strengthen regulation of the life settlement market.

Coventry “is disappointed that the attorney general’s office has chosen to file this complaint,” Coventry Chief Executive Alan Buerger says in the statement. “The attorney general’s civil complaint relies almost exclusively on a handful of out-of-context e-mails that do not support the allegations. Because the complaint’s rhetoric cannot be backed up with facts, it has no merit and will fail in a court of law.”

Moreover, most of the policy sellers have lawyers, or financial planners, or both, and “Coventry has dealt with them in good faith and with the highest standards,” Buerger says.

Securities analysts in the New York office of Fox-Pitt, Kelton have put out a comment suggesting that the Spitzer suit could have an effect on many companies in the life settlement industry.

Many companies implicated in the Spitzer suit “will cooperate and settle separately,” the analysts predict. “Major changes in disclosure and other business practices will be initiated to alter the life settlements business.”

Spitzer’s suit itself notes that Coventry bought 436 policies with a face amount of $720 million in 2002, and that volume rose to 1,318 policies with a total face amount of more than $3 billion in 2005, the analysts write.

“This implies a [compound annual growth rate] of roughly 65%,” the analysts estimate.

The analysts estimate Coventry may have paid a total of $427 million in ordinary commissions in 2002, 2003, 2004 and 2005.