The suits expose the complexities of the life settlement business. (AP Photo/Bebeto Matthews)

American International Group (AIG) and Coventry First, a leader in the life settlement market, are trading strong charges in competing lawsuits dealing with the appropriate interpretation of a 2006 deal where an AIG affiliate hired Coventry to help it acquire life policies in the then-booming life settlement market. The suits also expose for the first time the intricacies and complexities of the life settlement business and how it has morphed into different businesses as the boom became a bust.

The countering suits do this by exposing that AIG has expanded its settlement business by issuing lender protection insurance coverage (LPIC), which insures lenders who issued loans to finance the purchase of life insurance policies, which, Coventry First alleges, violates its contract with AIG. The lawsuit reveals that the dispute has been going on since 2010, and heated up in March 2013.

For example, in its counter-suit, Coventry First alleges that by issuing LPIC, the Lexington insurance unit of AIG “has as an unlicensed life settlement provider,” citing New York and Florida law.

Friday, AIG filed a lawsuit in Federal District Court in Manhattan alleging its Lavastone Capital LLC was defrauded by Coventry, people associated with Coventry, including its president, Alan Buerger and related businesses, by purchasing life policies for AIG at low prices, then selling the policies to AIG at inflated prices.

AIG alleged in the lawsuit that Coventry “engaged in an illegal and sophisticated scheme” that ultimately defrauded AIG out of more than $150 million. “The alleged scheme involved Coventry use of AIG confidential pricing information to secretly mark up the purchase price of life policy investments,” the suit alleged.

The suit makes breach of contract, breach of fiduciary duty and other common law claims against Coventry, and also seeks triple damages through a Racketeer Influenced and Corrupt Organizations Act (RICO) claim.

The suit seeks more than $1.5 billion in compensatory, statutory and punitive damages. 

Coventry immediately responded with a competing lawsuit in New York state Supreme Court in Manhattan, charging that AIG’s lawsuit “is an attempt to negotiate through litigation” and escape payments to Coventry the firm estimates are worth $700 million. The lawsuit alleges that Lavastone was formerly known as AIG Life Settlements LLC, and the company was formed to acquire life settlements for the various AIG insurance affiliates.

It alleges that Lavastone’s “new business team now refuses to honor its obligations.” These include buying life settlement policies exclusively through Coventry First. The Coventry suit alleges that Lavastone is doing so through a program unrelated to Coventry First under which one of its affiliates wrote LPIC, which insured lenders who issued loans to finance the purchase of life insurance policies.

The suit alleges that if a borrower defaulted on such a loan, Lavastone’s affiliates made payment and acquired beneficial ownership of the life insurance policy. Coventry said this violated its deal with Lavastone, and, as a result, Coventry First has been damaged to the tune of $100 million.

In a statement, Coventry officials said the AIG lawsuit is “is an effort to rewrite long-standing agreements that it now finds onerous.” The statement explained that AIG “has concocted” the allegations “to escape contractual provisions that limit its ability to resell policies in the tertiary (life settlement) market.”

In its suit, AIG said it contracted with Coventry the responsibility of finding “attractive” life settlements for Lavastone to purchase from policyholders on the open market, and paid Coventry more than $1 billion in fees to do so.

The suit alleges that, in return, Coventry was obligated to convey to Lavastone at exactly the same cost Coventry paid for the life policies that it procured for Lavastone. “Instead of fulfilling that obligation, Coventry formed an illegal enterprise with its co-conspirators, including the other defendants here, in which they abused Lavastone’s confidences” by buying life policies at prices below what it knew in confidence Lavastone would pay to purchase them, “laundered” the life policies’ titles and purchase prices through affiliated shell companies, and then induced Lavastone to purchase those policies at inflated prices, marked up “to approach or reach Lavastone’s ceiling, unbeknownst to Lavastone.”

In response to Coventry’s counter-suit, AIG issued a statement saying that Coventry First’s claim that Lavastone is making “retaliatory allegations of wrongdoing” are “baseless.” The AIG statement said that its suit “charges a classic racketeering enterprise run by the Buerger family, and seeks to hold the Coventry defendants responsible for a ‘shill bidding’ scheme to secretly siphon hundreds of millions from AIG by manipulating the price of life insurance policies purchased by AIG.”

AIG also said that Coventry’s responding lawsuit “is a baseless attempt to distract attention from the fraudulent and illegal scheme that AIG alleged in its complaint. We firmly believe Coventry’s claims are meritless, and we intend to fight them vigorously,” the statement said.