Contra Costa has sued 12 municipal bond insurers the county says sold it millions in coverage that became worthless after the subprime mortgage crisis in 2008.

Governments purchase bond insurance to raise their credit rating and lower the interest rates they pay on money they borrow to build schools, roads, libraries, jails and other facilities.

The county bought the insurance to take advantage of the carriers' AAA credit ratings, but the suit filed last week claims the companies failed to disclose that they had also insured or invested in subprime mortgage lenders. The insurers lost their AAA ratings when the subprime market collapsed.

Without the AAA rating, the premiums on the county's bonds rose, forcing it into an expensive refinancing, said Nanci Nishimura of Cotchett, Pitre & McCarthy in Burlingame, which represents the county in the filing.

"The AAA rating gets wrapped around the bond," Nishimura said. "When the insurers failed to tell Contra Costa, the county paid for bond insurance that proved worthless."

Contra Costa is also claiming it was forced to buy insurance because the bond insurers promoted a two-tiered credit rating system in which many businesses were given AAA ratings as a matter of course and governments were not.

"Public entities seldom default on the repayment of bonds, in contrast to private corporations," according to the suit. "Yet, under the dual credit rating system, public entities are

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rated under a stricter system than corporations and are rarely given a AAA rating," necessitating the insurance.

If the county wins the case, experts in the field will determine compensation for damages and liability, Nishimura said.

"We have no idea how much we could be compensated," said Deputy County Counsel Kate Andrus. "That's what we're trying to find out with the suit."

The suit was filed in Superior Court in San Francisco. The firm has filed 13 suits on behalf of Los Angeles, Alameda, Oakland, San Mateo, Riverside, Stockton, Sacramento and other entities and plans to file more, Nishimura said.

Contra Costa filed another suit in October 2008 against Wall Street firms that allegedly conspired to fix bidding on municipal bond investments and cost the county millions in higher interest payments and fees. The suit is being consolidated with individual and class action suits before a federal judge in New York, Nishimura said.

CDR Financial Products, a defendant in the case, and three executives were indicted by the Department of Justice for their participation as brokers in the bid-rigging scheme, Nishimura said. Another defendant, JP Morgan, has been charged with securities violations related to transactions in the scheme, she said.