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Cook County seeks $180 million in strip-search insurance flap

Tuesday, June 11, 2013
Crain's Chicago Business
by Greg Hinz

Cook County stands to win tens of millions of dollars — and maybe a lot more — if it wins a fraud lawsuit against insurer American International Group that received an initial green light in court this week.

Cook County Circuit Court Judge Thomas Mulroy rejected a defense motion to dismiss a whistle-blower suit in which the county and plaintiffs who were improperly strip searched at the County Jail seek triple damages against AIG. The ruling means the case now likely will proceed to trial, unless a settlement is reached.

Plaintiffs allege AIG fraudulently schemed to avoid paying liability insurance claims when the strip-search scandal broke in 2006. Of the total $55 million settlement, the county ended up having to pay $45 million in taxpayer funds — only $10 million came from AIG.

Now the county wants that money back, plus damages, the suit contends. “It could go into the billions,” says Michael Kanovitz, a Chicago attorney who represents the whistle-blowers.

AIG and its attorney here, Joseph Hinkhouse, did not respond to a request for comment.

A spokesman for Cook County President Toni Preckwinkle confirmed that the county has joined as a plaintiff and stands to gain a share of any damages recovered. “It is Cook County's position that AIG engaged in fraudulent activity,” the spokesman said.

The suit originally was filed in March 2012, under seal. That's typically the case with whistle-blower actions of this type.

But then Illinois Attorney General Lisa Madigan's office certified that the case as a legitimate action, which automatically resulted in it being unsealed, Ms. Madigan's office says. The case was unsealed a few months ago without public notice, and Cook County and Sheriff Tom Dart joined as co-plaintiffs a few days ago, Mr. Kanovitz says.

The suit alleges that around the time the strip-search story was breaking, AIG engaged in a “bogus transaction” to “mislead the county” into agreeing to switch coverage from one AIG subsidiary to another. Though the switch was made to seem innocuous, it allowed the company to sharply pare its financial exposure as an insurer of county liability.

In the end, the suit says, AIG refused to pay more than the $10 million, even though its actual exposure should have been at least $60 million. That made a settlement “impossible” with the thousands of plaintiffs, some of whom ended up getting $25,000 to $65,000 each in federal jury awards.

AIG owes the county treble damages of $180 million, plus other damages to members of the injured class of which the county could get a share, the suit said.

Mr. Kanovitz said his intent is not to reward the county for misconduct, but to make it whole and make a point. “If I could get back the money the county had to spend, it would be a great victory,” he said.

AIG is best known for having received an $85 billion federal bailout. Its liquidity crisis in 2008 was one of the prime causes of the great recession that, in some ways, continues to this day.

Cook County also has separately sued another firm, USI Insurance Services Corp., charging that it failed to deliver on coverage that would have provided $20 million toward the eventual settlement in the strip-search cases.

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