NEW YORK (Reuters) – American International Group Inc has agreedto settle a $274 million lawsuit by a former executive who said theinsurer refused to pay him during the financial crisis in 2008.

The settlement came as a trial was due to have begun Tuesday ina federal court in New York, which was expected to reopen the issueof executive pay at AIG. The group was bailed out by the U.S.government in the crisis.

The executive, Kevin Fitzpatrick, was president of an AIG realestate unit until he left the New York-based insurer in 2009.

The terms of the settlement are confidential, Sean O'Shea, alawyer for Fitpatrick, said on Wednesday. “We're very happy.”

Jon Diat, a spokesman for AIG, confirmed the settlement butdeclined further comment.

In his lawsuit, which was filed in 2009, Fitzpatrick said AIGbreached agreements with him and entities he controlled thatentitled him to a share of profits earned on AIG real estateinvestments.

The 22-year AIG veteran said the company, in October 2008,refused to make profit distributions to him and other employees ofhis unit, AIG Global Real Estate Investment Corp.

AIG's refusal to pay came a month after the U.S. governmentagreed to the first part of what became a $182-billion bailout ofthe insurance giant, which had insured financial products linked tomortgages that failed in the financial crisis.

After AIG stopped making the profit payments, Fitzpatrick saidhe resigned.

The company denied wrongdoing and said Fitzpatrick had been paideverything he was owed. AIG also called Fitzpatrick's departure atermination, saying he stole “vast quantities” of confidential,proprietary information in document, computer drive and emailform.

In a sign of the case's significance, the company had regularlydisclosed the lawsuit as a material piece of litigation in itsquarterly reports.

In its most recent one, filed Thursday, AIG said Fitzpatrick hadsaid he was owed at least $274 million, although it noted he wasalso seeking additional unspecified amounts of carried interest andpunitive damages.

Bailout

The lawsuit, filed in December 2009, came as AIG was attemptingto move past a fire storm of public outrage over $165 million inbonuses to employees in the unit whose complex financial productshad caused the company's massive losses.

The bonus fiasco continues to plague AIG even after the U.S.sold off its remaining stake in the company last year.

In September, Chief Executive Bob Benmosche was forced toapologize for a “poor choice of words” after equating the bonuscriticism with the lynching of African-Americans in the DeepSouth.

Fitzpatrick didn't work in AIG Financial Products, the unit thatwas at the heart of the bonus flap and the company's near collapse.But the trial, which would have begun Tuesday, was expected torevisit some of the events at the time of the bailout.

In a decision last week, U.S. Magistrate Judge Michael Dolingersaid Fitzpatrick could introduce, at trial, a March 2009 letter byAIG's CEO at the time, Edward Liddy, to the Treasury secretary,Timothy Geithner, describing the insurer's intent to slash costs,including through voluntary departures and for-causeterminations.

The judge said the letter could be viewed as evidence of “thesevere financial constraints under which AIG was operating at thevery time when the company undertook an investigation to determinewhether it had a basis to terminate plaintiff for cause.”

The case is Fitzpatrick et al v. American InternationalGroup Inc et al, U.S. District Court, Southern District of NewYork, No. 10-00142.