(AP Photo/Richard Drew)

American International Group and the state of New York are on a collision course over the authority of the state to levy taxes on an insurer because it is conducting sales activities in the state but not insuring the risks involved in the products being marketed through its New York businesses.

In a lawsuit filed in federal District Court in Manhattan Thursday, AIG acknowledges that New York has the authority to regulate the business of insurance issued to insureds resident in New York, but it does not have authority to regulate the business of insurance issued to foreign insureds resident outside of the state.

The two former AIG subsidiaries at the heart of the dispute are American Life Insurance Company (ALICO) and Delaware American Life Insurance Company (DelAm). They were sold to MetLife in 2010 as part of the AIG divestitures required to pay off the federal government, which rescued it in 2008, and return to private control. MetLife and AIG announced the probe was underway in securities filings in November.

The dispute comes at a time when U.S. insurers are coming under pressure from investors to show growth, and more and more considering entering foreign markets aggressively.

“Yet New York officials, including those in the state Department of Financial Services (DFS), have threatened to impose New York’s insurance licensing requirements on AIG for ALICO’s marketing of foreign life insurance products that are regulated by foreign insurance authorities and which cover exclusively foreign insureds located outside the State of New York and indeed outside the United States,” the lawsuit says.

The lawsuit also says that New York officials have advised AIG that they will initiate administrative proceedings and other actions in order to impose substantial monetary penalties on AIG based on the marketing of ALICO’s foreign insurance products from and into New York, which state “purport to constitute an ‘insurance business,’ without a New York license.”

Of interest to all insurers is AIG’s allegation in the complaint that the New York DFS is battling AIG “despite express language in the New York Insurance Law that operations such as ALICO’s are not subject to the state’s insurance licensing scheme, and despite New York officials’ longstanding practice of allowing ALICO and numerous other companies throughout the insurance industry to engage in such activities within the State of New York.”

Matt Anderson, a spokesman for DFS Superintendent Benjamin Lawsky, issued a statement Monday saying the DFS “strongly disagrees” with AIG’s position, and added clearly that the state probe of AIG will continue.

The suit was filed by Quinn Emanuel Urquhart & Sullivan and assigned to Judge Alison J. Nathan.

On Monday, the New York DFS said that MetLife would pay $50 million in fines and another $10 million to avoid prosecution, to settle the case. MetLife also agreed to cooperate in the state’s prosecution of AIG on the issue.

See also: MetLife settles on license issues, AIG balks

In a statement, AIG said it does not believe that the conduct in question violated the law or caused harm to anyone. It said the DFS position is “unconstitutional.”

AIG said it believes the Due Process and Commerce Clauses of the Constitution, as well as the First Amendment, prohibit the DFS from requiring a New York insurance license in order for anyone, “merely by virtue of their presence in New York, to engage in marketing or solicitation activity on behalf of foreign insurers seeking to provide insurance to foreign customers.”

AIG added that, “the DFS is bound by the rule of law. It is not free to interpret and enforce the law as it sees fit, regardless of the wording of statutes, the intent of the legislature or the principles embodied by the Constitution.”

In another interesting twist to the latest lawsuit, AIG said that in filing suit, AIG does not concede liability for the activities of its former subsidiaries and “reserves all rights in this regard.”

That’s because, as AIG notes in a footnote to the lawsuit, “Principles of corporate form and separateness normally would bar Defendants from holding the parent, AIG, responsible for the activities of its subsidiaries, ALICO or DelAm, especially where, as here, the entities at issue are former subsidiaries now held by a new parent.”

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