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| An Unhappy Outcome |
Since I haven’t seen anything on this topic in re Greensill, I thought I’d offer a few thoughts on how the fundamental difference between (1) a guarantee of payment and (2) an insurance policy affects the Greensill “situation”.
And how it might motivate actions by participants in this unhappy event.
The difference between these two instruments is frequently misunderstood, including by supposed finance professionals. Hopefully, this post will fill in any extant knowledge gaps.
A guarantee of payment (as opposed to a guarantee of collection) is a legally binding obligation by the guarantor to make payment to the guaranteed party if the debtor does not make a scheduled payment. Proof of the debtor’s non payment is generally fairly “easy” to make. Usually then the guarantor makes payment without undue delay.
An insurance contract is a legally binding obligation by the insurance company to pay the policyholder if the policyholder submits a valid claim.
Keep those last two words in mind.
The insurance company reviews the policy conditions, the insured’s (or policyholder’s) actions, and makes the initial determination of the validity of the claim. Some policyholders have been known to complain that such assessments seem to move at a glacial pace.
As that should imply, the insurance company has more legal defenses against payment than a guarantor. And its payment is not as fast given the time to review the claim.
The insurance policy spells out the conditions for validity.
For example, in obtaining the policy, did the policyholder make a material misrepresentation or fail to disclose material information that would reasonably have caused the insurance company to refuse to write the policy? In such a case the entire policy is invalid.
Did the policyholder fail to take reasonable steps to prevent the loss?
For example, if he left his Maybach unlocked with the key in the ignition and his insurance company knew this fact, they would likely decline the claim for theft.
If she routinely stored gasoline in her villa and filed a claim for fire damage and the insurance company knew this fact, the result would be the same.
Did the policyholder take reasonable steps to mitigate damages?
When the fire broke out, did she call the fire department? Or just let the villa burn down?
If his trade counterparty was in financial difficulty and he should have been aware, did he shorten payment terms, ask for collateral, lower his credit limit for aggregate outstandings?
There may also be other specific policy exclusions: strike, riot, civil commotion, actions of political entities, foreign exchange controls, etc.
We can therefore expect that Tokio Marine and other insurance companies will be carefully reviewing their obligations under any outstanding policies on Greensill related debt.
I saw in today's FT (23 March) that Tokio Marine had opined that the policies might not be valid.
Today (2 April) the FT reported that Grant Thorton acting as administrator for Greensill had been unable to verify certain invoices underpinning loans to Liberty Commodities - part of Mr. Gupta's group.
Actually, the article says that several firms whose names appeared on invoices denied any commercial relationship with Liberty. You can guess that this means that any "insurance" on these invoices is invalid.
One would of course have to review the actual policies and the respective governing laws to determine the defenses the insurance companies might have.
But I wonder if it’s possible that policies issued in excess of underwriting limits might be one?
Part of that might turn on whether Mr. Brereton was working for Greensill (as an insurance broker) or for Tokio Marine (as its employed underwriter).
As well one can imagine Credit Suisse fund managers' angst over the difference between insurance and a guarantee as well as potential liabilities that might arise from potential "defects" in disclosures in selling documents vis-a-vis disgruntled clients whose attorneys will be going over said documents carefully.
Keep up to date on developments.
The FT continues to follow the Greensill saga with an interesting article on Mr. Brereton earlier this week.
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1 comment:
Think of the case where a "trade receivable" wasn't valid.
Press reports indicate that Greensill financed "future" invoices including some from "potential new customers". If insurance policies were written on these "receivables" then they would not be insurable as they did not exist.
Or if amounts were inflated, e.g., a $1 million receivable was somehow "inflated" and then insured for $10 million.
Receivables among related entities. Presumption here is that the policy would exclude these.
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