CHICAGO—A federal appeals court has dealt another blow to Liberty Mutual Group Inc.'s years-old legal battle against American International Group Inc. in a case involving the alleged underreporting of workers compensation premiums.

In the ruling Friday, the 7th U.S. Circuit Court of Appeals in Chicago denied Liberty Mutual's request for permission to appeal a federal judge's decision to grant preliminary approval of AIG's offer to settle litigation with a class of plaintiffs comprised of hundreds of rival insurers.

The appeals court also denied Liberty Mutual's request to block the mailing of settlement notices to potential members of a class of insurers that would be eligible to share the $450 million.

Sources familiar with the case said the settlement notices went out Friday immediately following the judge's decision.

The case stems from allegations made in 2006 by then-New York Attorney General Eliot Spitzer that AIG had underreported workers comp premiums to avoid paying its fair share of residual market assessments.

The former attorney general reached a settlement in which AIG was to pay about $350 million to the 50 states to settle the allegations.

But in the meantime, several commercial insurers, including Liberty Mutual units Safeco Insurance Co. of America and Ohio Casualty Insurance Co., launched litigation alleging they also were harmed by AIG's alleged underreporting. Several of those insurers, however, later backed accepting AIG's $450 million settlement offer, which Liberty Mutual has opposed as inadequate.

In a statement, AIG said it is “pleased that the federal appeals court rejected Liberty Mutual's latest attempt to block this settlement supported by many of AIG's largest competitors and the lead insurance regulators of every state. AIG is optimistic that the trial court will grant final approval of the settlement after it takes up that question at a November hearing."

Liberty Mutual said: "Although we are disappointed, the denial of this discretionary appeal was not unexpected at this stage of the proceeding. Liberty Mutual Group is determined to pursue this matter through to its conclusion."

Liberty Mutual also fought back with a new website encouraging potential class members to review its information before deciding whether to accept the settlement, opt out or object to it. The website is at www.aig-wcsettlementoptoutobject.com.