AIG’s United Guaranty Loses Appeal of $45 Million Award

An American International Group Inc. unit lost a bid to overturn a court award of more than $45 million to SunTrust Banks Inc. for refusing to cover losses tied to borrower defaults on mortgages.

A federal appeals court in Richmond, Virginia, today ruled that AIG’s United Guaranty unit violated the terms of its contract with SunTrust by failing to pay for the losses. The 2-1 decision also reinstated a counterclaim that United Guaranty filed against SunTrust over payment of premiums.

“Under Virginia law, United Guaranty is stuck with the provisions it drafted,” U.S. Circuit Judge James Wynn wrote in the opinion.

SunTrust, based in Atanta, sued United Guaranty in 2009 for breach of contract, claiming that beginning in January the previous year, the insurer “systemically” denied claims on loans that hadn’t been underwritten using an automated system from mortgage investor Fannie Mae.

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

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

Insurer Counterclaim

United Guaranty filed a counterclaim against SunTrust seeking to force the bank to keep paying premiums on the policy which will now go back to the judge for further proceedings.

It argued in court papers that SunTrust loans can 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 the counterclaim.

Jon Diat, a spokesman for AIG, said he couldn’t comment immediately on the ruling. Hugh Suhr, a spokesman for SunTrust, declined to comment, citing ongoing litigation.

After a non-jury trial, U.S. District Judge Robert Payne in Richmond found United Guaranty “knowingly billed for and collected premiums” on loans that the company wasn’t going to cover in a default.

He ordered United Guaranty to pay SunTrust about $34 million for covered losses, $6 million in interest and $5.4 million in legal fees and costs, according court records.

The case is SunTrust Mortgage Inc. v. United Guaranty Residential Insurance Company of North Carolina, 11-1956, U.S. Court of Appeals for the Fourth Circuit (Richmond).