NEW YORK—The decision by American International Group Inc. and former executives Maurice R. Greenberg and Howard I. Smith to settle all pending legal disputes is a net gain for both sides, according to industry observers.

At a minimum, the settlement reached late last month relieves both parties of crushing legal costs. It also allows AIG and Mr. Greenberg to go forward with their businesses, analysts say.

The settlement also encompasses any claims involving two former AIG affiliates, C.V. Starr & Co. and Starr International Inc., which are controlled by Mr. Greenberg—AIG's former chairman and chief executive officer. He left AIG in 2005.

The long-running legal dispute between the two sides had extended to matters such as ownership of a Persian rug at AIG's former headquarters.

“Under the terms of the settlement, the parties have agreed to release each other from all claims, including any claims by Greenberg and Smith against AIG for indemnification of future legal fees and expenses or settlement costs,” AIG said in a statement. The parties “agreed to submit to an independent third party Greenberg's and Smith's claims for past legal fees and expenses for a determination of which of those fees (up to a $150 million cap) AIG is legally obligated to pay under AIG's charter and bylaws and Delaware law.”

“We are pleased that we have resolved our differences,” Robert Benmosche, AIG's CEO, said in the statement. “The resolution of these long-running disputes will remove a significant distraction and expense and allow AIG to better focus its efforts on paying back taxpayers and restoring the value of our franchise for the benefit of all our stakeholders.”

In the statement, Mr. Greenberg said he is “pleased that these long-running disputes are now over, and I want to express my appreciation for Bob Benmosche's help, and the help of the AIG board, in resolving them. I look forward to assisting AIG in trying to preserve and restore as much value as possible for all of AIG's stakeholders.”

The statement added that Mr. Smith, AIG's former chief financial officer, concurred with Mr. Greenberg.

An expert on corporate law cautioned, however, that arbitration isn't a panacea for all disputes.

“Sending everything to arbitration doesn't mean that the lion is lying down with lamb,” said Lawrence A. Hamermesh, Ruby R. Vale professor of corporate and business law at the Widener University School of Law in Wilmington, Del.

“But if all the disputes are truly concentrated in one forum, there is a considerable efficiency,” he said. “The other advantage of arbitration is that at least both sides have agreed to the forum, which isn't always the case when you have five different courts scattered around the world deciding important issues. It's not necessarily true that arbitration eliminates all the burdens of litigation, and there can still be significant discovery and, of course, extended arbitration hearings, all of which takes time and money.”

Industry analysts, however, gave the agreement high marks.

“It's better for a firm to have a constructive relationship with one of its major shareholders rather than litigation with such a shareholder,” said Bruce Ballentine, lead analyst on AIG with Moody's Investors Service in New York.

“I think it is a win-win,” said John L. Ward, CEO of Cincinnati-based Cincinnatus Partners L.L.C. “It was a big ugly fight that was nothing but a distraction to the bigger issues, AIG's continued existence, and their ability to get traction and pay back the government loan and survive.”

John Wicher, principal of John Wicher & Associates Inc. in San Francisco, also used the term “win-win” to describe the agreement. “The settlement is very positive for the company. The litigation was a very costly distraction,” he said, adding that the situation “really underscores the importance of not letting litigation take on a life of its own. When parties have to submit items like rugs and artwork to legal documents, it demonstrates how out of control this litigation was.”

He said the settlement opens the door for Mr. Greenberg to have a dialogue with AIG. He also said it is positive sign that AIG's new CEO has signaled that he is prepared to put these distractions to rest and focus on the more critical issues such as executing the sale of noncore businesses, and returning AIG's core property/casualty business to what it once was.

“And I think AIG shareholders are better served by having Hank Greenberg around,” Mr. Wicher said.

For AIG, having a cooperative arrangement with Mr. Greenberg may be more valuable in the long-term vs. any recovery it might have received through the courts, said Bill Bergman, an analyst with Morningstar Inc. in Chicago. He called the settlement overall “very positive.”

In addition, ending the legal disputes makes it easier for Mr. Greenberg to move forward with his plans for Starr International, said Mr. Wicher.

In a related matter, Bernstein Research issued a report last week holding that AIG's property/casualty operations could face a reserve shortfall of about $11 billion next year. The report sent the price of AIG's stock tumbling, although the stock recovered somewhat by the end of the week

In a statement sent out to brokers and others last week, AIG said that it “does not comment on analyst reports”.

However, it noted that “to the extent that Bernstein's analysis was based on information from Schedule P to AIG's domestic property casualty insurance company Annual Statutory Financial Statements,” AIG included language in the filing stating: “It is not possible for any person to accurately determine the adequacy of the company's loss and loss expense reserves using the company's Schedule P data as the sole source.”

AIG also noted that the 2008 calendar year data reported in Schedule P is particularly distorted as a result of the restructuring of certain foreign operations previously conducted as branches of domestic companies.