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Greensill and insurers – the story is just beginning

Tenzor Ltd. Working Capital Management and Corporate Restructuring Igor Zaks

Igor Zaks, Editorial Board Member of TRF News and President of Tenzor Ltd, explains the recent developments in Greensill case and how these impact the credit insurance industry.

Insurance Claims

As it just started to appear, most of the Greensill story followed the headlines, and new development occurred. January 13th, Credit Suisse announced it filed five insurance claims related to US$1.17bn in exposure across two of its Greensill-linked supply chain finance funds. It did not say with whom it had filed the claims. Just to put this number in perspective- according to Berne Union statistics, it is comparable to the total claims paid by short-term credit insurers worldwide.

There is also an initial hearing for a previous Greensill action filed against IAG over a US$35m claim (allegedly related to Emirates Hospitals Group) being heard at Australian Federal court 2-nd February 2022.

Given the size of the claims and many controversies, it is highly likely that a protracted legal battle is assured. Insurers previously made multiple statements (a number of them were quoted in the FT back in July 2021- such as “IAG has argued that Greensill Capital or Greensill Bank “made false statements” about the insured claims and underlying businesses, adding that the finance firm “potentially even deliberately deceived in advance.” The insurers also questioned the validity of the policies in the first place (as they outline in the letter to the Treasury Committee).

Potential Defences on the Claims

Another critical factor is the timing of the claims without knowing the guidelines; there is usually a maximum period for claim submission after the insured event, which rarely exceeds six months… What was the insured event, and when did it occur? Then (regardless of other questions about policy and claim validity), were the steps for loss minimisation adequate? Were the insures consulted?

There are multiple potential defenses available to insurers. Another critical factor is that many other pieces of Greensill related litigation (and associated discoveries) can provide ample material for this case. And, separately, if insurers are being found liable for all or part of these claims, they will try to offload it through re-insurance treaties – one might expect re-insurers are going to invoke various defenses there as well.

Enron Memories

Looking at the history, there are a lot of similarities between what is happening now around Greensill related insurance and what happened around 2001 Enron bankruptcy with litigation between JP Morgan and a consortium of 11 insurers.

At the time, J.P. Morgan used surety bonds issued by insurance companies, which provided financial guarantees that oil and gas would be delivered. But after Enron filed for bankruptcy in December 2001, the insurers claimed foul play and refused to make good on those claims. In turn, JP Morgan tried to argue that insurers entered the contract without intention to pay. Many legal issues seem to have a degree of similarity, such as the use of “forward sale contracts” and a debate about insurance vs. financial guarantee. There was also a lot of press coverage supporting both sides.

The case was eventually settled for US$655m toward losses that J.P. Morgan incurred. This case caused enormous damage to the industry at the time, with banks being very cautious about using insurers, insures being careful about credit insuring the banks (only recently did this trend reverse), and rating agencies and regulators asking all types of questions.

Impact of Litigation

The prolonged insurance litigation that is likely to follow from the Greensill case may have various effects. Firstly, it will test the interpretation and robustness of multiple clauses and structures in credit insurance contracts (and separately in re-insurance treaties) that may provide much-needed clarity in its future use. On the other side, whatever way it will go (complete claim refusal, partial or full payment) it will have some consequences for the insurance market (such as available capacity or participation of smaller carriers – some already left the market)

It is also likely to have an effect perception of insurance in the eyes of the financiers, regulators, and rating agencies- how the industry reacts and adjusts will be critical there.

First published at TRF News.

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