NEW YORK--MBIA Inc. is suing two directors and officers insurers for refusing to cover the financial guarantee insurer's costs to fight regulatory investigations and shareholder lawsuits related to its efforts to mitigate a huge loss 10 years ago.

Armonk, N.Y.-based MBIA filed the lawsuit last week in U.S. District Court in New York against its primary D&O insurer, Federal Insurance Co., a subsidiary of Chubb Corp. of Warren, N.J., and excess insurer ACE American Insurance Co., a subsidiary of Philadelphia-based ACE USA.

Both Federal and ACE American wrote $15 million of claims-made coverage for MBIA between February 2004 and February 2005.

The coverage dispute was triggered when the Delaware Valley Group of the Allegheny Health, Education & Research Foundation, a Pittsburgh-based hospital chain, defaulted on a bond in 1998 that MBIA guaranteed. The default resulted in a loss exceeding $250 million for MBIA, according to its lawsuit.

To mitigate the loss, MBIA entered into finite risk transactions with three reinsurers.

The Securities and Exchange Commission began investigating the legitimacy of those transactions in 2001 and in November 2004 subpoenaed MBIA about the deals. The same month, the New York attorney general's office also subpoenaed MBIA about the transactions.

The SEC then broadened its investigations to examine whether MBIA's financial statements accurately reflected losses involving other policyholders.

MBIA in January 2007 paid $75 million to settle with the SEC and other authorities over the reinsurance transactions covering the AHERF loss. An independent consultant that MBIA was required to retain determined in July 2007 that the insurer had not violated accounting or SEC rules related to the other losses the SEC had investigated.

Meanwhile, MBIA has faced several securities class action and derivative lawsuits over how it accounted for the losses that the regulators investigated and for entering into the finite risk transactions.

MBIA considered settling the securities claims, but it said that Federal and ACE refused to give it their consent.

The plaintiffs, whose claims were dismissed by a trial court, are appealing.

The derivative action cases have been dismissed, but MBIA must pay its own defense costs.

According to court papers, MBIA's defense costs exceed $17.5 million.

Federal has recognized $8.9 million of defense costs and has covered $6.4 million, which reflects MBIA's $2.5 million deductible, according to court papers.

ACE American has refused to cover any of MBIA defense costs, arguing that it has no obligation to respond until Federal had paid out its full policy limits.

MBIA says the ACE American policy obligates the excess insurer to respond once the policyholder's defense costs exceed Federal's limits, regardless of whether the primary insurer has responded.

Representatives for both Federal and ACE American declined to comment.