AIG’s Lavastone begins trial against Coventry First in N.Y.

August 27, 2015 at 10:09 AM

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(Bloomberg) — An American International Group Inc. unit and Coventry First LLC began a trial in a dispute over bets in the insurance market on when people would die.

Lavastone Capital LLC, the AIG subsidiary, claims Coventry ripped it off by more than $150 million in a 2006 deal meant to help it acquire life insurance policies from people seeking to sell them for upfront cash.

The trial in Manhattan federal court will hinge on details of the so-called life settlements, in which an investor buys insurance policies from individuals, pays the premiums until they die, and then collects the payout. The arrangement becomes less profitable for the investor the longer the person survives.

The AIG unit said it provided Coventry with secret pricing and underwriting data as part of the deal, paying more than $1 billion in fees. In return, Coventry was obligated to convey to Lavastone at cost the life policies it bought.

Fort Washington, Pennsylvania-based Coventry instead formed an "illegal enterprise," bought policies at prices below what it knew Lavastone would pay and induced it to purchase those policies at inflated prices, according to the complaint.

The secondary market for U.S. life policies emerged in the 1980s when the AIDS outbreak 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 $18 billion in net benefits, according to the complaint.

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

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