Royal Insurance, St. Paul Mercury Insurance Seek to Cancel Enron Coverage

February 25, 2002

Two insurance companies are moving to revoke coverage for directors and officers of Enron Corp. in a federal bankruptcy court in New York because they charge the Houston energy trader misled them, according to the Washington Post.

Royal Insurance Co. of America and St. Paul Mercury Insurance Co. safeguarded some top Enron officials being sued in connection with the Enron scandal, with a combined total of $50 million. The officials are insured over $350 million from 10 different insurers.

Bankruptcy lawyers asked the court to order insurance companies to issue advance payments of $20 million to cover Enron’s legal bills deriving from private lawsuits and investigations by the Justice Department and Securities and Exchange Commission.

The petition is the first step toward refusing to honor or canceling Enron’s policies. Specific allegations were not named in court documents.

Judge Arthur J. Gonzalez is scheduled to hear arguments on March 6. Royal’s policy states that it pays $25 million after other insurers pay the first $250 million in liability. St. Paul’s policy is similar; it pays $25 million after others pay $200 million.

According to some legal experts, it is not unusual for insurance companies to dispute the amount of damages they are asked to pay, but revoking coverage is less common, especially for a complex policy such as Enron’s. In order to prevail, the insurance companies must convince the judge that they relied on fictitious statements provided by Enron that would have had a significant influence on their decisions to provide coverage.

If Royal and St. Paul’s succeed, other insurers will protest their own payments. According to University of Virginia insurance-law professor Kenneth Abraham, it is common for insurers to carefully review the application when faced with a big claim. If any statements given to obtain coverage are discovered to be false, the insurer is permitted to cancel the policy.

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