Insurers Want Out of Enron Contracts

February 28, 2002

Eleven major insurers are fighting to remove Enron from their contracts, as the scandal related to the company’s bankruptcy has been embedded with allegations of deception and fraud in relation to financial guarantees backing the energy giant.

According to a report by the Associated Press, the insurers have thus far refused to pay $1.1 billion worth of guarantees to J.P. Morgan Chase, citing deception with regards to energy transactions between Enron and Morgan. Insurers maintain that they were misled about the types of contracts it signed with Enron.

A Federal District Court judge in New York was to see to the issue Feb. 27, but any resolution could take months.

The insurers insist Enron officials misled them when executive liability policies were being written. Royal Insurance Company pointed out that Enron restated several years worth of financial records last November, just two months after the coverage period had begun.

A bankruptcy judge will rule on the issue March 6.

Some legal scholars declared the liability coverage would be void if Enron executives are found guilty of fraudulent behavior. Insurers would then be left trying to recover payments.

Several executives are currently under investigation by Congress, the Justice Department and the Securities and Exchange Commission.

Companies such as Allianz AG’s Fireman’s Fund Insurance Co. and Chubb Corp.’s Federal Insurance Co. claimed the agreements to Morgan were intended to guarantee deals centering on the delivery of natural gas and oil.

Shortly after Enron’s collapse, Morgan requested payment from the insurers who refused, claiming that the transactions were derivatives, or intricate financial contracts whose value is derived from an underlying security, index or commodity. Insurers argued that the transactions were not covered under the terms of the $1.1 billion in guarantees.

Morgan denies any wrongdoing with insurers. They asked for an immediate ruling at a recent hearing, but a lengthy trial is expected.

Topics Carriers

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