Swiss Re Sues XL Over Armstrong Credit Swap

May 23, 2001

Swiss Re Financial Products Corp. has filed suit in New York against XL Insurance Ltd. over its refusal to pay a $20 million claim made by Swiss Re FP in connection with the bankruptcy of Armstrong World Industries last December.

The main issue concerns the wording of the contract Swiss Re FP bought in a credit swap in June of 2000. XL maintains that it issued a credit insurance policy covering the debts of Armstrong Holdings, not Armstrong World Industries, and has therefore refused to pay the claim.

Swiss Re FP apparently thought the company had changed its name, and therefore claims that the wording of the contract should include the bankrupt portion of Armstrong, and the claim should be paid. It launched a similar action against XL in London last month, which is still pending.

Despite the wording on the contract Swiss Re FP may have a case. New York attorney Stephen Selig told Reuters News Agency that, “It would seem that there was a mutual mistake of fact, which makes the intention of both parties relevant.” In addition the holding company has no debt, and it’s unlikely that that Swiss Re FP would have bought a credit policy it didn’t need.

Investment analysts agree that the case highlights the importance of contractual terms in derivative contracts, which are sometimes sloppily drafted.

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