CHICAGO — CIFG Assurance North America Inc. Monday sued Assured Guaranty Corp., charging it with breach of contract violations for reneging on its obligation to cover the policy on $83.3 million of Xenia Rural Water District bonds as part of its 19-month-old reinsurance agreement.
Assured in May formally decided to exclude the Xenia policy from its pact with CIFG. Assured agreed to reinsure $13 billion of CIFG-backed bonds — the bulk of its’s public finance debt portfolio — in a reinsurance agreement executed in January 2009.
Assured has based its position regarding the Xenia policy on a provision in the reinsurance agreement that allows it to exclude from the agreement any policy for a bond that was below investment grade as of Oct. 31, 2008. Assured officials in past statements have said the bonds should not have been rated investment grade after Xenia drew on reserves.
CIFG and Assured on Oct. 31, 2008, reached a master agreement outlining what policies would be reinsured and part of a future novation process. The reinsurance agreement and a services agreement under which Assured would act as CIFG’s agent were formally signed in January 2009.
CIFG asserts in its lawsuit that the Xenia bonds were rated investment grade based on its internal scale and separately by Standard & Poor’s.
“Assured’s refusal to honor its contractual reinsurance obligation was made in bad faith and without any reasonable basis whatsoever. Assured arbitrarily asserted, purely as a pretext for avoiding its obligation, that the Xenia bonds did not meet the criteria for reinsurance because, according to Assured, they were not 'investment grade,’ ” the lawsuit reads.
Assured said in a statement that it had not yet seen the complaint, but believes it is without merit.
“The $83.3 million of Xenia, Iowa, Rural Water District 2006 revenue bonds were not eligible for inclusion in the CIFG portfolio reinsured by Assured Guaranty because they were not investment grade as of the effective date of the agreement,” the statement said. “Assured Guaranty continues to work with CIFG to novate the other bonds in the assumed portfolio, a process which is being led by CIFG.”
Xenia began drawing on its reserves in December 2007 to make debt service payments but those draws were permitted under its bond covenants as long as the district adhered to a repayment schedule. Xenia disclosed the draws, its plans to replenish the fund, and its overall financial condition in its fiscal 2007 statements, which were available to Assured during its due diligence leading up to the reinsurance agreement, CIFG argues in the lawsuit.
Xenia’s financial condition continued to deteriorate and in 2009 it failed to make monthly payments required to replenish its December 2008 draw on reserves. Standard & Poor’s in August 2009 stripped the bonds of their investment-grade rating, lowering the credit to BB-plus from BBB. At the time, Assured continued to act as CIFG’s agent and gave no indication it planned to reverse its position on the policy, the lawsuit states.
It was not until this past March when Assured determined a claim would “almost certainly” be made under the policy to fully cover the upcoming June 1 payment that Assured began “exploring” whether the Xenia policy was indeed a covered policy under the reinsurance agreement, the lawsuit states.
The lawsuit alleges a breach of contract of the reinsurance agreement, the service contract and the master agreement. It asks the court to order Assured to make good on the reinsurance pledge and to novate the policy— the process by which all covered policies would be transferred and become directly guaranteed obligations of Assured.
