The U.S. trade association for financial guarantors filed on Nov. 8 an amicus curiae--or friend of the court--brief asking a U.S. court not to accept an insurance company's defense in an on-going case in which the insurer is charged with failing to pay out on a financial guarantee it had written. The case is being keenly watched by some derivatives lawyers as the judgment could have a profound impact on the credit derivatives market.
The Association of Financial Guaranty Insurers (AFGI) has weighed into a case in the U.S. District Court in Delaware against insurer Royal Indemnity Co. brought by MBIA Insurance Co. and Wells Fargo Bank Minnesota. Royal Indemnity is refusing to pay out on a guarantee in connection with student loans, for which Wells Fargo was the trustee. Royal is asserting that the issuer of the loans committed fraud in connection with the issuance of insurance policies. Officials at the firms could not be reached for comment.
Lary Stromfeld, partner at Cadwalader, Wickersham & Taft in New York, which is representing AFGI, said if Royal succeeds this could have a profound impact on asset-backed and other securities that rely on insurance policies of the type issued by Royal and for policies written by AFGI members.
In particular, credit derivatives players want to know with certainty that guarantor's obligations are enforceable, comments another attorney. Buyers and sellers of credit protection on a financial guarantor need to know with certainty whether a failure to pay has occurred, and raising defenses against payment introduces uncertainty as to whether there was an obligation to pay that was met, he explained.