AIG Appeals $45 Million Court Order in SunTrust Mortgage Insurance Dispute

A unit of American International Group Inc. (AIG), the insurer majority owned by the U.S. government, filed a notice of appeal challenging a judge’s order to pay more than $45 million to SunTrust Banks Inc. (STI) to fulfill mortgage insurance contracts.

AIG’s United Guaranty unit is seeking to reverse a court ruling that it must pay Atlanta-based SunTrust about $34 million for covered losses, $6 million in interest and $5.4 million in legal fees and costs, according court records. The notice of appeal was filed yesterday in federal court in Richmond, Virginia.

SunTrust sued United Guaranty in 2009 for breach of contract, saying the insurer didn’t meet obligations to cover losses tied to borrower defaults. Beginning in January 2008, United Guaranty “systemically” denied claims on loans that hadn’t been underwritten using an automated system from mortgage investor Fannie Mae, SunTrust said in its complaint.

United Guaranty also denied claims for losses from loans where SunTrust didn’t verify all the information on borrower applications, according to the lawsuit.

Mark Herr, a spokesman for New York-based AIG, said the insurer expected the appeals court to reverse the lower court’s exclusion of evidence that, if admitted, “would have changed the outcome.” Hugh Suhr, a spokesman for SunTrust, declined to comment on the appeal notice.

Combo Loans

The loans at issue in the litigation, known as combo loans, involve a combination of first- and second-lien mortgages.

United Guaranty said in court papers that SunTrust loans may be disqualified from coverage if the bank failed to meet guidelines or misrepresented information about the mortgages.

“SunTrust expressly represented -- falsely and in breach of the policies -- that these combo loans each complied with specified underwriting guidelines mutually agreed to between the parties,” United Guaranty alleged in a counterclaim filed against SunTrust.

United Guaranty identified about 12,000 loans out of 100,000 SunTrust loans that were ineligible for coverage, according to an August decision by U.S. District Judge Robert E. Payne in Richmond.

United Guaranty filed for dismissal of the case and sought sanctions against SunTrust last year alleging that a SunTrust employee had altered e-mails that were potential evidence in the case. In March, Payne ruled that some e-mails had been altered by a SunTrust employee and ordered the company to pay United Guaranty’s legal fees related to the altered e-mails.

Premiums Collected

After a bench trial in July, Payne found United Guaranty “knowingly billed for and collected premiums” on loans that the company wasn’t going to cover in a default.

“UG’s disregard for its obligation is demonstrated by the fact that it set out to determine which loans were not eligible for coverage under its stated interpretation of the policy and then, after ascertaining from the insured that there were almost 12,000 loans meeting that description, UG continued to accept the very premiums its executives say it could not accept,” Payne said in an Aug. 19 ruling.

AIG is seeking to gain market share at mortgage insurance operations as less diversified rivals, including PMI Group Inc., were forced to stop writing coverage. United Guaranty was the third-largest home guarantor by total volume during the six months ended June 30, according to Inside Mortgage Finance.

Mortgage insurers pay lenders when homeowners default and foreclosures fail to recoup costs. Carriers suffered losses as the number of soured loans surged during the recession. Rejected claims, or rescissions, in recent quarters have improved results at United Guaranty, as well as MGIC Investment Corp. and Radian Group Inc., the two largest U.S. mortgage insurers.

The case is SunTrust Mortgage Inc. v. United Guaranty Residential Insurance Company of North Carolina, 09-00529, U.S. District Court, Eastern District of Virginia (Richmond).

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Laura Marcinek in New York at lmarcinek3@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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