Insurance broker Aon Corp. will have to make good on a $10 million surety bond after an appeals court ruled that Societe Generale, a French bank, was not responsible for covering the loss involved.
The incident stems from a loan default back in 2000 by Ecobel Land Inc. which had secured a $9.3 million loan from Bear Stearns International Limited in 1999 to build condominiums in the Philippines.
According to court documents, as part of the agreement, Ecobel agreed to purchase a surety bond for the $10 million from the Government Service Insurance System (GSIS), an agency of the Philippines government.
When the $10 million payment came due in 2000, Ecobel defaulted, and the GSIS refused to pay the bond because the loan was transferred by Bear Stearns to Bankers Trustee Company, Ltd., without GSIS' authorization.
Bear Stearns had entered into a credit default swap agreement with Aon for the loan in 1999, which was transferred to Bankers Trustee,. To protect itself, Aon entered into a similar $10 million agreement with Societe Generale.
Aon initially said it would not pay its obligation because it disputed the definition of the default, but U.S. District Court Judge George B. Daniels in Manhattan ruled the broker was obligated to pay. Aon then sought the $10 million from Societe Generale under its agreement.
The U.S. Court of Appeals for the Second Circuit in New York on Monday overturned Judge Daniel's decision.
In its 27-page ruling, the appeals court said Aon's contract was different from the agreement with Bankers in reference to the obligated payee. The Bankers/Aon agreement referenced GSIS as the obligated payee. However, the Aon/Societe Generale agreement referenced the government of the Philippines–specifically, a government treasury bond.
The court ruled that since the government of the Philippines did not default on the payment, creating a "credit event," then Societe Generale was not obligated to pay the $10 million.
A call to Aon for comment on the ruling was not returned.
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