The suit comes on top of similar suits, which, altogether, put the bank in a precarious position, analysts say. The bank's stock dived 20 percent, or $1.66, to $6.51, revisiting levels seen at the nadir of the recession, in March 2009.
AIG said Bank of America and two companies that were later gobbled up by the bank, Countrywide and Merrill Lynch, sold the insurance company $28 billion in securities backed by home mortgages between 2005 and 2007, at the height of the housing boom. It said it looked at more than 260,000 of the underlying mortgages, and found that the bank's "stated metrics" for 40 percent of the securities were false.
In one case, a borrower said she had been the owner of a construction business for 25 years, which would have made her 10 years old when she took ownership, AIG said.
Bank of America denied the allegations, saying AIG was big enough and sophisticated enough to know the risks.
"AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets," said Bank of America spokesman Lawrence Grayson. "It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."
AIG spokesman Mark Herr shot back: "It is disappointing but unsurprising that Bank of America continues to attempt to blame others for its own misconduct. Investors, no matter how sophisticated, were entitled to rely on its numerous written representations about the securities it sold."
AIG shares fell $2.52, or 10 percent, to $22.58. They hit a 52-week low of $22.10 earlier in the day.
In June, Bank of America agreed to pay $8.5 billion to a group of investors for selling them poor-quality mortgage securities. AIG's suit is separate, but the company is raising questions about whether the settlement went far enough. On Friday, New York Attorney General Eric Schneiderman urged the judge to reject the settlement, calling it unfair.
Bank of America wrote a number of bad mortgages, but it is in worse shape than other major banks such as JPMorgan Chase & Co. and Wells Fargo & Co. because of its purchase of Countrywide for $4 billion in 2008. What seemed like a bargain price for the country's largest mortgage lender has cost the bank tens of billions more in mortgage losses, regulatory fines, repurchases of poorly written loans and expensive litigation.
In January the financial institution paid $2.6 billion to settle buyback claims on home loans sold to Fannie Mae and Freddie Mac. In April, the bank agreed to pay up to $1.6 billion to Assured Guaranty Ltd., an insurer that also pressed the bank to repurchase shoddy mortgages.
In March the Federal Reserve did not allow Bank of America to increase its dividend, citing uncertainty about the depth of its mortgage problems. It was the only denial issued to the four largest U.S. banks.