(Bloomberg) -- American International Group Inc.’s Lavastone Capital LLC and its longstanding partner in acquiring life insurance policies, Coventry First LLC, sued each other over alleged violations of business agreements, with the AIG unit claiming the other company scammed it out of millions of dollars.

Lavastone said that in 2006 it hired Coventry to help acquire life policies from people seeking to sell them. In such deals, called life settlements, an investor buys insurance policies from individuals and pays the premiums until they die, when the investor collects the payout. The arrangement becomes less profitable for the investor the longer the person survives.

The AIG unit said it provided Coventry with confidential pricing and underwriting information as part of the agreement, paying more than a billion dollars in fees. In return, Coventry was obligated to convey to Lavastone at cost the life policies it procured.

Coventry instead formed an “illegal enterprise,” bought policies at prices below what it knew Lavastone would pay and induced the unit of New York-based AIG to purchase those policies at inflated prices, according to a complaint filed today in federal court in New York.

“In sum, defendants are scam artists whose criminal scheme to defraud” Lavastone falls within the conduct federal racketeering law is meant to address, the company said.

Lawsuit’s Claims

The suit includes claims for breach of contract, negligent misrepresentation, unjust enrichment and racketeering. The AIG unit, which said the breaches cost it more than $150 million, seeks unspecified damages, which can be tripled under the civil racketeering statute.

The secondary market for U.S. life policies emerged in the 1980s when the AIDS epidemic led some patients to sell their insurance policies to pay for treatment. Lavastone now owns about 5,700 life settlements that are expected to pay out net benefits of $18 billion, according to the complaint.

Coventry, in its separate lawsuit, accused Lavastone of breaking an agreement to buy policies from it exclusively and asking for a court ruling that Lavastone’s “retaliatory allegations of wrongdoing” are baseless. Coventry said in its complaint, filed today in New York state court in Manhattan, that it may have suffered more than $100 million in damages.

Coventry Allegations

Lavastone breached its agreement with Coventry by acquiring policies through a program to insure lenders that finance the purchase of life insurance, Coventry said in its complaint. A Lavastone affiliate took possession of life insurance policies when borrowers defaulted on their loans, Coventry said.

“When Coventry First raised the issue of Lavastone’s breach of the exclusivity provision, Lavastone chose to take the offensive,” Coventry said in the complaint. Lavastone “manufactured” an interpretation of the agreement under which it could claim Coventry violated certain requirements, Coventry said.

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

The case is Lavastone Capital LLC v. Coventry First LLC, 14-cv-7139, U.S. District Court, Southern District of New York (Manhattan). The countersuit is Coventry First LLC v. Lavastone Capital LLC, 652712-2014, Supreme Court of the State of New York (Manhattan).

Register or login for access to this item and much more

All Digital Insurance content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access