13 November 2012

Insurance Insight: Insurers urged to check books as S&P held accountable for 'misleading' rating

Insurers have been urged by a leading lawyer to check their books to see whether they have open notifications from credit rating agencies, after an Australian court ruled that Standard & Poor's was liable for damages to investors.

The Australian Federal Court has ordered Standard & Poor's and a bank that arranged a derivative product to pay AUS$30 million (£19 million) in damages to several Australian local governments. The claim concerned the AAA rating given by S&P to two structured debt issues in 2006, which later lost almost all of their value.

Simon Garrett, partner at CMS Cameron McKenna, said: "The judgement could well reignite claimant lawyers' and investors' (who have lost money) interest in ratings agencies as a potential source of recovery. Insurers and reinsurers who have been nursing significant losses from financial institutions ought to take another look at their books to see whether they have open notifications from credit rating agencies in order to see whether this judgement could lead to further and bigger problems."

Garrett added: "It signals the first ruling on a rating agency's liability for investor losses. While the role of the rating agencies, which tend to receive their fees from the entities which they are rating, came under much scrutiny during the sub-prime crisis, the ruling is the first of its kind on a rating agency's liability for investor losses and is the first time that a rating agency, many of which have previously argued that their ratings are simply opinions, has been taken to a full trial over a structured financial product."

"The decision means that rating agencies that have previously been unaccountable to investors may no longer be able to hide behind their disclaimers to protect them from liability. It has been reported that this decision could signal the way for investors to recover significant losses from S&P and the issuing bank in Europe."

S&P has confirmed that it plans to appeal against the Australian decision.

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