There’s another interesting twist to the saga of the failed zinc plumbing fixtures described here yesterday involving the Koolani Condominium, which recently won a $12 million arbitration award for construction defects, including that plumbing.

It seems that the developer of the Koolani, Crescent Heights of America and its local subsidiary, Sunset Heights Hawaii LLC, obtained several layers of project insurance from National Union Fire Insurance and Chartis Specialty Insurance, both subsidiaries of the insurance giant, AIG. Most of the companies contractors and subs also signed on to the blanket insurance policies. The companies reportedly paid a $6 million premium for what was described as “a comprehensive ‘wrap-up’ insurance program” covering all expected risks and potential claims.

But last fall, the two insurance companies went to court seeking a ruling that they would not have to pay off on claims stemming from the $140 million construction project. The developers, Crescent and Sunset, filed a counterclaim in which they allege misrepresentation and “bad faith” on the part of the insurers. Actually, among other claims, they assert that AIG and its subsidiaries intentionally rejected valid claims in order to artificially boost AIG’s value and allow multimillion dollar bonuses to be paid to top execs.

Of course, it’s one thing to say it and another thing to prove it in court. But with lots at stake, it’s likely they’ll be pulling out all the stops on both sides.

The developers’ lawsuit refers to AIG’s insolvency in September 2008, when the company collapsed under the weight of “guarantees of various risky and speculative investments, including but not limited to, mortgage default swaps and other derivative contracts.”

The federal government had to step in with a $123 Billion (with a “B”) bail-out of AIG.

During and subsequent to the bailout of AIG, AIG continued to pay multi-million dollar bonuses to the executives of AIG, some of whom were also the executives of National Union and Chartis.

At the same time, the counterclaim alleges, “National Union and Chartis very aggressively marketed their insurance products in order to hold onto market share which was threatened by the default swap scandal and government bailout of AIG.”

But following a major decision in the Group Builders decision here in Hawaii, which limited construction defects coverage by general contractors liability insurance policies, the suit alleges:

http://www.leagle.com/xmlResult.aspx?xmldoc=in%20haco%2020100519272.xml&docbase=cslwar3-2007-curr

“AIG purposely, fraudulently and in bad faith instructed its claim handling agents and subsidiaries not to honor property damage claims under OCIPs and construction wrap-up insurance policies issued in the State of Hawaii by its subsidiaries and controlled insurance companies, including National Union and Chartis Specialty.”

The lawsuit alleges the insurances denied “numerous claims” despite knowing that the Group Builders decision didn’t apply to the types of policies obtained by the Koolani developers.

The lawsuit further alleges the claims were denied by AIG “in order to inflate the value of its controlled subsidiaries, avoid setting adequate reserves, and to continue paying inflated multimillion dollar bonuses and unmerited executive compensation.”

It will certainly be interesting to see if this case progresses far enough to put those allegations to the test.