In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (John Wiley & Sons Inc., second edition, 2008), I wrote that the cash flows of an insurance operating company could not be diverted for other corporate purposes, thus providing some security for the policyholders. Last week, lawyers representing a group of policyholders of American International Group Inc. (AIG) filed a lawsuit in California Superior Court against the company, its executives and its auditor, PricewaterhouseCoopers. The policyholders allege that AIG had improperly diverted capital from its insurance operating companies, thereby undermining the critical asset for claims payment. State insurance commissioners are supposed to prevent this from happening; specifically, holding companies cannot extract capital from their insurance subsidiaries, no matter how much pressure they are under. However, the policyholders who are plaintiffs in this lawsuit alleged that AIG had pledged the cashflows of its insurance subsidiaries to repay the Federal Reserve Bank for the government bailout funds. This is absolutely without precedent and raises some troubling questions with respect to the regulatory responsibilities of the state and federal governments. I will be following this case with great interest.