A decision by an insurance carrier for the state to not provide coverage for legal claims made by defrauded foreign investors in projects in the Northeast Kingdom will leave taxpayers footing the bill for nearly all of the $16.5 million settlement deal reached this summer.

Vermont Attorney General Charity Clark told members of the House Appropriations Committee during a hearing Wednesday of AIG Property Casualty’s decision to deny coverage, though she didn’t go into great detail about the company’s reasoning.

According to documents provided to VTDigger in response to public records requests to Gov. Phil Scott’s administration and the Vermont Attorney General’s Office, state officials have known about the insurer’s decision for years.

The state sought coverage after the lawsuit was filed, records show. AIG responded with a letter in January 2020 in which it cited several reasons for denying the state’s claim, including that an “exclusion” to the insurance policy “precludes” coverage for a claim “arising out of an alleged willful commission of a crime by you or other dishonest, fraudulent or malicious acts.”

The letter references a lawsuit filed by Russell Barr, an attorney for the foreign investors, that alleged that the state and several of its employees and officials were at best negligent in the oversight of the state-run EB-5 regional center overseeing the Northeast Kingdom projects and at worst active participants in it.

The AIG letter, obtained by VTDigger as part of the public records requests, also stated: “Our summary of the allegations in no way implies that we believe that the allegations asserted by the Plaintiffs are true or deserve any merit; but for the purposes of analyzing coverage we must consider the current allegations alongside the relevant policy(ies).”

The state responded with a letter in April 2020 seeking to have the insurance carrier reverse its decision. According to that letter, the state argued it did not engage in any “willful” commission of a crime or other dishonest, fraudulent or malicious acts.

AIG did not change its mind.

Instead, the state and the insurance carrier reached a settlement in September 2023 in which AIG agreed to pay $850,000 to resolve the “EB-5 claims,” far less than the up to $16.5 million the state agreed to pay in July to resolve legal claims brought by defrauded investors.

That settlement with AIG was reached to “avoid litigating the coverage issue,” Clark told VtDigger.

The larger $16.5 million settlement with defrauded investors announced in July involves the state, a federal court-appointed receiver and 64 people who sued Vermont. The agreement, according to the attorney general’s office, settled all “pending and potential” lawsuits against the state by the investors in the Northeast Kingdom projects.

As a result of the AIG settlement, all but $850,000 of the $16.5 million settlement will now be paid for with taxpayer money.

The projects were led by former Jay Peak owner Ariel Quiros, former resort president and CEO Bill Stenger and attorney William Kelly, a close adviser to Quiros. All three were indicted on federal criminal charges and sentenced to prison for their roles in the EB-5 cases.

Each EB-5 foreign investor put at least $500,000 into one of eight Northeast Kingdom projects with the expectation that, if their investment created a certain number of jobs, they would become eligible for green cards, which would allow them to live and work in the U.S. on a permanent basis. Due to the fraud associated with the projects, many investors’ efforts to obtain permanent residency remain in doubt.

The $16.5 million settlement was structured over three years and will be paid into the Jay Peak receivership, which now oversees many of the remaining assets that were at the center of the fraud allegations, including Burke Mountain ski resort. The settlement also calls on the state to continue supporting investors’ attempts to secure permanent U.S. residency, or green cards. If successful, the state’s payout could be reduced by as much as $4 million.

Clark, the state’s attorney general, said in an earlier interview that the settlement was structured to be paid over three years.