Bermuda-based MDL Active Duration Fund is suing divisions of AIG and Chubb after they refused to provide defence and indemnity for an alleged fraud and breach of contract lawsuit lodged by Ohio Attorney General Jim Petro.

Pittsburgh-based parent company MDL Capital Management, its executives Mark D. Lay, Steven L. Sanders, and Edward Adatepe Inc. and Bermuda-based MDL Active Duration Fund, Ltd. filed the breach of contract, declaratory judgement, and bad faith action against AIG?s American International Specialty Lines Insurance Company and Chubb?s Federal Insurance Company with the United States District Court for the Western District of Pennsylvania this week.

The MDL complaint accuses the insurers of ?blatantly improper denial of coverage? and alleges that the denial was due to AISL?s and Federal?s perceptions that they would be required to pay out their policy limits of $10 million and $5 million respectively. MDL?s policy with AISL ran from May 19, 2004 until May 19, 2005 however MDL lawyer Joseph Luciana told the Toledo Blade that the contract runs until ?30 days after the end of the policy period,? a clause that would force American International to pick up part of MDL?s courtroom tab.

The Federal Insurance policy was to run until 2006, but MDL said that insurer denied a similar claim.

MDL claims it notified AISL of the suit on June 10, 2005, the day AG Petro filed to recover a $215 investment the Fund allegedly lost in its handling of investments for the Ohio Bureau of Workers? Compensation (BWC). Notification to Federal followed four days later, MDL said in its complaint. MDL accuses the insurers ?extreme bad faith? by unreasonably failing to properly and diligently investigate its claims for insurance coverage and failing to provide defence and/or indemnity for the claims.

While neither policy protects against criminal or fraudulent activities, both insured MDL against liabilities stemming from ?wrongful acts,? a phrase that applies to any breach of duty, neglect, error, or misleading statements. The complaint states that the Ohio Litigation Complaint asserts that Plaintiffs are legally liable to the Bureau as a result of a Wrongful Act or Wrongful Acts committed during the policy periods.

Mr. Luciana told the Blade that the insurance companies have not taken a position on whether the attorney general?s accusations of securities fraud are outside the definition of a wrongful act.

?We hope they?ll change their mind and cover the claims, but so far they?ve denied them,? he said.

The plaintiffs are seeking damages and a declaration that they are entitled to defence and indemnity up to the amount of at least $15 million under the AISL and Federal insurance policies for claims asserted against them in Ohio State Bureau Workers Compensation.

They also seek bad faith damages, including interest, attorneys fees and punitive damages, ?for AISL?s outrageous denials of coverage for unambiguously covered claims and their post-notice conduct in attempting to deprive Plaintiffs of that unambiguous coverage?.