AIG to pay L.A. Unified nearly $79 million in claims settlement

AIG has been one of the largest investors in L.A. Unified's school-construction bonds. It also has provided investment accounts for teachers who want to put aside savings for retirement.

AIG to pay L.A. Unified nearly $79 million in claims settlement
L.A. Unified had sued insurer AIG over its refusal to pay claims on schools needing environmental cleanup.
August 06, 2012
By Howard Blume
Los Angeles Times

Insurance giant AIG will pay nearly $79 million to the Los Angeles Unified School District to settle a lawsuit over its failure to pay claims on properties with environmental and pollution hazards, The Times has learned.

Although AIG admitted no wrongdoing, the $78.8-million settlement, combined with earlier payments under the policy, approach the full value of $100 million in coverage the district purchased in 1999.

"This is a gold medal, not a bronze, in terms of success, a lot of money," said David Tokofsky, a former member of the Board of Education that voted to purchase the policy and later sued to enforce it. "Sometimes the huge L.A. Unified is the little guy against such giants as AIG."

The district's goal at the time was to provide a financial hedge against any extraordinary cleanup costs incurred during its $20-billion school construction effort.

The move proved wise for L.A. Unified and a poor gamble for AIG, which is best known for its central role in helping trigger the nation's 2008 economic crisis.

The district paid about $7.5 million up front for the 20-year policy and also agreed to pay the first $100,000 on any claim. Even so, the claims quickly absorbed what the district put in, and AIG resisted paying more. L.A. Unified filed suit in 2006, beginning a protracted legal battle that consumed millions of dollars, according to people inside the district who were not authorized to disclose the information.

Both sides agreed to keep the settlement confidential, except as legally required. L.A. Unified disclosed the settlement terms in response to a public records request, but officials declined to comment.

"We're pleased that we were able to reach an amicable resolution with LAUSD and have no comment beyond that," said Frank Kaplan, an attorney who represented AIG and its affiliates.

According to court documents filed by L.A. Unified, AIG's intention "was, all along, to book the premium on the policy — and the business from a prominent public agency — and to resist subsequent claims payments they had promised to pay."

AIG, on the other hand, said in court filings that L.A. Unified was planning "to undertake an extensive program of environmental investigation and remediation … with the intent to deceive [AIG] and to induce it to provide coverage."

As part of this alleged scheme, the insurance company contended that L.A. Unified tried to avoid its own responsibility to pay for cleaning sites long known to contain toxins. Time after time, the district "concealed material information" and converted an insurance policy into a $100-million construction subsidy, according to AIG.

The decision to seek environmental insurance grew out of the district's experience with the Belmont Learning Complex — erected on property that was not fully investigated before its purchase. The eventual cost of that school ballooned to more than 10 times early estimates — for many reasons — and its completion was delayed more than a decade. Belmont became a symbol of the school system's dysfunction.

The policy specifically excluded Belmont, which finally opened in 2008 as the Edward R. Roybal Learning Center.

But an older hot spot, Park Avenue Elementary in Cudahy, became a focus of contention. Park Avenue, which opened in 1968, was built atop a toxic dumpsite; and before long, a chemical, tarry sludge seeped periodically to the playground. In 1989, the district closed the school for a year, performed an interim fix, then abandoned further efforts.

Years later, when new problems arose there, the district resumed work at Park Avenue and filed insurance claims with AIG for the costs. The insurer paid $6.3 million, but the claims soon exceeded $11.1 million, according to court documents. AIG refused to pay more and threatened to take back earlier payments.

Sites with problems known before the policy term, such as Park Avenue, were not eligible for claims, AIG insisted. The insurer also said the work was unnecessarily expensive and that AIG had the right to approve cleanup measures in advance.

The district contended that AIG failed to exclude Park Avenue from potential claims when it had the chance and that L.A. Unified performed work under the direction of state regulators. AIG had access to public officials and reports as well as to the district's environmental consultants and records, according to L.A. Unified. The situation at Park Avenue and some other properties also had been the subject of news reports.

The parties disputed claims arising from more than three dozen schools.

Under state rules, all or most settlement money is likely to go into construction and maintenance funds, according to the district.

By next year, the district will have completed about 140 new schools and hundreds of improvement and renovation projects.

AIG has been one of the largest investors in L.A. Unified's school-construction bonds. It also has provided investment accounts for teachers who want to put aside savings for retirement.