American International Group Inc. opted against joining its former chief executive officer in a lawsuit against the U.S. after lawmakers said the case was an insult to taxpayers who bailed out the insurer.

“The AIG board has determined to refuse Starr’s demand in its entirety, and will neither pursue these claims itself nor permit Starr to pursue them in AIG’s name,” the insurer said today in a statement about ex-CEO Maurice “Hank” Greenberg’s Starr International Co.

The insurer’s board met today to hear arguments from Starr and the U.S. over whether the company should join the case, which claims the rescue of AIG violated shareholders’ rights. New York-based AIG received a $182.3 billion bailout to save it from collapse during the 2008 financial crisis, after it fell short of money to pay clients who bought protection against losses on securities linked to home loans.

Allowing the suit to go forward would have been “reputational suicide,” for AIG, James Cox, a law professor at Duke University, said in an interview before the announcement. “You’re essentially suing the hand that had fed you and rescued you from financial collapse, and I don’t think there’s any way to tell that story in any other way.”

AIG’s decision to avoid the suit may lead to a clash with Greenberg, 87, who led the firm for almost four decades before he was forced out in 2005. Starr, an AIG shareholder, would likely challenge the insurer’s decision to opt against the case, AIG said yesterday.

‘Run Aground’

The suit, filed by Starr in 2011, says the U.S. takeover of AIG in September 2008 was a violation of the constitutional rights of shareholders to due process and equal protection of the law. The U.S. owned as much as 92 percent of the insurer during the bailout.

A federal judge gave approval in July for the case to proceed. A parallel case against the Federal Reserve Bank of New York was dismissed in November.

AIG was “taken over and run aground by a cadre of auditors, lawyers, outside directors, and government officials,” Greenberg says in a soon-to-be-published book. “The AIG story shows how such custodians run amok.”

Lawmakers including Senators Elizabeth Warren and Robert Menendez and Representative Peter Welch have said AIG should avoid the suit. Editorials in the New York Times and USA Today also urged the insurer not to sue.

AIG would have gone bankrupt if the U.S. hadn’t rescued it, leaving shareholders with nothing, Jack Gutt, a New York Fed spokesman, wrote in an e-mailed statement yesterday. “There is no merit to these allegations,” he said on the suit.

Three Choices

AIG said yesterday it had three paths to respond to the case, in which Starr makes some claims in the insurer’s name. AIG could take over the claims and litigate them itself, allow Greenberg to proceed on its behalf, or prevent him from prosecuting the claims.

The insurer, once the world’s largest, has sought to rebuild its reputation after repaying the bailout last year. AIG reached deals to sponsor U.S. and New Zealand rugby teams, redesigned its logo and restored its name to the property- casualty and life insurance operations. It began running television ads this year to thank taxpayers for their support and highlight that the U.S. made a profit on the rescue.

The case is Starr International Co. v. U.S., 1:11-cv-00779, U.S. Court of Federal Claims (Washington).