Two Insurers Seek to Void Enron Policies

February 21, 2002

By JONATHAN D. GLATER and MICHAEL BRICK

Saying they were misled by Enron (news/quote), two big insurers are balking at honoring policies they wrote covering the company’s directors and officers against the cost of lawsuits, recent court filings show.

The insurers, the Royal Insurance Company of America and the St. Paul Mercury Insurance Company, said in separate filings in United States Bankruptcy Court in Manhattan that when issuing the policies they had relied on what turned out to be “material misrepresentations” by Enron.

Lawyers expect that if Royal and St. Paul are successful in walking away from their policies, the nine other insurers that wrote officers’ and directors’ coverage for Enron will follow their lead. That could leave Enron, which filed for bankruptcy protection in early December, and the officials themselves subject to covering shareholder claims and legal fees. In all, the company has a reported $350 million in directors’ and officers’ coverage.

Any shrinkage of the pool of insurance money would complicate efforts to settle the numerous shareholder lawsuits against Enron and its advisers, lawyers said.

Late last week, lawyers for Enron investors and lawyers for Arthur Andersen, Enron’s auditor, held preliminary settlement discussions. One lawyer involved in the litigation said Andersen had proposed paying investors a minimum of $267 million, an amount reflecting the firm’s insurance coverage, less its legal costs.

The settlement discussions were first reported yesterday by USA Today.

A spokesman for Andersen would not comment directly on the settlement talks. The firm issued a statement saying that “reaching out to the groups affected in this case is consistent with our commitment to address the issues raised by Enron’s collapse in a straightforward and constructive manner.”

Lawyers involved in the talks said a settlement was unlikely to be reached so early in the litigation, before all the facts are known. New disclosures of wrongdoing would increase the amount that shareholders could demand of Andersen, plaintiffs’ lawyers said.

If the pool of directors’ and officers’ liability insurance money shrinks, plaintiffs’ lawyers will probably seek more money from Andersen and other financially healthy companies that may be implicated in Enron’s collapse. That will make it harder for the plaintiffs and Andersen to agree on settlement terms, several lawyers said.

But the insurers seeking to deny coverage may not find it easy to walk away, said Edward M. Joyce, who heads the insurance practice group at the New York office of the law firm of Heller Ehrman White & McAuliffe.

The insurers, he said, will have to show that they would not have sold Enron the coverage had they not been misled by the company. “They have to basically show that the application contained a misrepresentation and that the misrepresentation was material,” Mr. Joyce said.

The filings by the two insurance companies are vague, however, offering little explanation for why they thought they had been misled.

The filing by St. Paul, a part of the St. Paul Companies of Minnesota, says only that the company “has determined that the policy was issued based upon material misrepresentations.”

Royal, which is based in Naperville, Ill., and is a unit of the British insurer Royal and SunAlliance, goes a little further, stating, “Based upon the current information known to Royal, it appears that material misrepresentations were made to Royal during the underwriting process.”

St. Paul’s policy provided $25 million in coverage after payment of $200 million by other insurers; Royal provided $25 million after payment of $250 million by other insurers. A first hearing on the matter is scheduled for March 6.

A lawyer representing Enron’s outside directors, W. Neil Eggleston of the Washington firm of Howrey Simon Arnold & White, declined to comment on the filings by the insurance companies.

The outcome of the insurers’ efforts is hard to predict, Mr. Joyce said, because insurance companies rarely argue that policies should be void because of misrepresentations.

Normally, lawyers said, companies pay the costs of defending directors and are reimbursed by insurance, or they take out insurance that reimburses board members directly. But with Enron in bankruptcy proceedings, “the company’s ability to indemnify is subject to a lot of different arguments by different parties,” said Martin J. Bienenstock, whose firm, Weil Gotshal & Manges, is representing Enron.

“That’s one reason why the first preference of any officer or director, present or former, is to go directly to the insurance policy, which provides for payment of defense costs,” he said. Enron has already filed a motion asking the bankruptcy court to order insurers to advance money from the policies to help the directors and officers pay their legal fees.

http://www.nytimes.com/2002/02/21/business/21INSU.html?ex=1015311154&ei=1&en