American International Group Inc has agreed in principle to pay $450 million to settle a lawsuit with rival insurance companies over alleged under-reporting of premiums on workers' compensation policies, court documents showed.

The civil lawsuit was filed in mid-2009 by two firms, Safeco Insurance Co of America and Ohio Casualty Insurance Co, on behalf of a group of insurance companies and alleged a $1 billion workers' compensation under-reporting scheme at AIG.

However, the proposed settlement was instead reached between AIG and seven other insurers that were among those affected by AIG's conduct in the 1980s and 1990s and excludes Safeco Insurance and Ohio Casualty, both units of Liberty Mutual Insurance .

Insurers that agreed to settle include Hartford Financial Services Group and a unit of Travelers Cos . Liberty Mutual has opposed the settlement.

It is unfortunate that Liberty is refusing to participate in this fair and reasonable settlement. As the seven other settling insurers have recognized in seeking to intervene in the action, Liberty's preference to continue litigating is not in the best interests of the class members, AIG spokesman Mark Herr said in an email to Reuters.

Hartford and Travelers did not return messages seeking comment, after regular business hours. Liberty Mutual could not be reached for comment.

Following federal and state investigations in 2005, it was disclosed that AIG had engaged in a series of longstanding false premium reporting practices to evade state insurance taxes and residual market obligations.

AIG reached a $1.6 billion settlement with New York and federal authorities in 2006, admitting to false premium reporting.

(Reporting by Santosh Nadgir in Bangalore and Dhanya Skariachan in New York; Editing by Lincoln Feast)

Aig Lawsuit