AIG Loses Bid to Duck Coverage for Ohio Lender’s Bankruptcy Deal

American International Group Inc. units lost their bid to avoid a trial over paying for Huntington National Bank’s settlement with bankruptcy trustees over former customers’ fraudulent transfers.

The insurance giant’s subsidiaries, AIG Specialty Insurance Co. and National Union Fire Insurance Co., failed to convince a federal district judge that Huntington’s claims were time-barred and excluded, after an appellate court earlier this year ruled the claims are insurable under Ohio law. But the insurer did demonstrate a “genuine dispute of material fact” over whether Huntington had knowledge of events that led up to its claim against AIG, which could ultimately prevent the bank from receiving coverage, the US District Court for the Southern District of Ohio said Thursday.

The lawsuit stems from Huntington’s relationship with two companies involved in a Ponzi scheme that banked with Huntington in the early 2000s. The bank discovered the fraud but didn’t report it, allowing one of the companies, Cyberco, to continue repaying a loan to the bank, according to court records. The scheme collapsed in 2004 following an FBI raid, and trustees for the two companies sued Huntington in bankruptcy court for harming other lenders by allowing the fraud to continue. Huntington settled with the trustees for $32 million in 2018.

The Columbus, Ohio-based bank sued AIG after the insurer repeatedly rebuffed Huntington’s request for coverage of part of the settlement. The Ohio district court initially granted summary judgment in favor of AIG, ruling the bankruptcy settlement wasn’t covered under Ohio law. But the Sixth Circuit in February reversed the decision and sent the case back, saying the district court failed to properly analyze Huntington’s claim under state law.

AIG has requested summary judgment on its argument that Huntington’s claim for bad faith denial of coverage is subject to a statute of limitations and barred by the terms of its insurance policy. The district court Thursday denied the request, citing a tolling agreement that froze the statute of limitations. AIG also failed to convince the judge to issue a quick ruling denying coverage under certain provisions in the policy, such as an exclusion for false statements and representations in the insurance application.

But the court sided with AIG that Huntington’s claims are subject to a $5 million sublimit. And it denied Huntington’s bid for summary judgment over whether the bank had “prior knowledge” of the claim at hand before buying the insurance policy.

A lawyer for Huntington declined to comment on the ruling. AIG didn’t immediately respond to a request for comment.

Carpenter Lipps LLP and Haynes and Boone LLP represent Huntington. Carlile Patchen & Murphy LLP and Arnold & Porter Kaye Scholer LLP represent AIG.

The case is The Huntington National Bank v. AIG Specialty Insurance Company et al, S.D. Ohio, Docket No. 2:20-cv-00256, 6/27/24.