AIG Sues State Financial Regulator in Licensing Dispute -- Update

By Leslie Scism 

American International Group Inc. sued New York's top financial watchdog on Thursday, escalating a potentially costly licensing dispute into an unusual confrontation with one of AIG's primary regulators.

The global insurer filed a lawsuit in federal court in Manhattan Thursday afternoon, seeking a ruling that the New York Department of Financial Services is wrongly interpreting a state law regarding licensing requirements.

The department under Benjamin Lawsky has been an aggressive enforcer, and earlier this week fined MetLife Inc. $50 million in a case directly related to the matter AIG is now contesting in federal court. The MetLife fine was the largest ever against an insurer by New York state regulators.

Lawrence J. White, a professor at New York University's Stern School of Business, said AIG challenging its regulator in federal court is "not a once-in-100-year event, but it is unusual."

Most companies don't want to get on the bad side of the regulators, "but if they really feel this is an egregious situation, they will just grit their teeth and appeal to the court," he said.

The dispute involves whether AIG unlawfully sold insurance in the state to multinational companies without proper licensing through two insurers that AIG sold to MetLife in 2010.

MetLife agreed to the record fine to settle allegations that the operations bought from AIG were selling insurance without proper licensing. In addition to the fine, MetLife agreed to pay $10 million to avoid possible prosecution by the New York County District Attorney.

AIG's lawsuit states 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 alleged improper marketing in New York when AIG owned American Life Insurance Co., or Alico, one of the two units.

New York regulators sent a subpoena to AIG on Tuesday seeking emails and testimony related to the sales activity, a person familiar with the matter said.

AIG maintains that the "express language" in state law doesn't require the licensing. "The Department has identified no legitimate state interest justifying its unprecedented attempt to expand its regulatory reach."

Responding to the litigation, a spokesman for Mr. Lawsky said, "AIG may not want to cooperate with our probe, but they are not above the law--no matter how big or powerful they may be. We will respond in court."

AIG's lawsuit notes that New York officials in their consent order with MetLife didn't "identify a single harm to a single insurance consumer (in New York or otherwise), nor does it allege that the activities at issue somehow threatened the stability of the New York insurance market."

AIG seeks a declaratory judgment that the New York actions are unconstitutional, including alleged violation of due process and free speech.

AIG also seeks injunctive relief prohibiting New York officials "from commencing or continuing any proceeding...or imposing any penalty" against AIG in the matter.

In a statement, AIG said that the New York regulators' conclusion in the MetLife consent order that there was a violation of state law "compels us to seek a declaration from the court that the department's position is unconstitutional."

Since taking office in 2011, Mr. Lawsky has been an aggressive, inaugural leader of New York's new financial regulatory office, which was created by merging banking and insurance oversight.

A former prosecutor, Mr. Lawsky has investigated a number of potential financial abuses, including how mortgage loans are handled and consumer lending.

Write to Leslie Scism at [e-mail]

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