British insurer Equitable Life takes its former directors and auditors Ernst & Young to court today, seeking $7 billion damages for alleged failure to warn of impending collapse because of over-generous guarantees.
The claim is the largest ever to be brought against private individuals or an auditor in Britain and sets a precedent by targeting non-executive directors as well as their executive counterparts.
Over the past few months, Equitable and E&Y have engaged in a phoney war, each expecting victory, but they have also said the case will cost them £30 million ($56 million) or more each, and with reputations also at stake, an expensive battle looms.
Equitable closed its life fund to new business in 2000 after being forced by Britain's highest court, the House of Lords, to honour high guarantees on policies it sold in the 1970s and 1980s.
The House of Lords said the company could not continue a strategy of paying lower bonuses on policies with guaranteed annuity rates (GARs), which it had tried to do because they had become prohibitively expensive.
The move pushed Equitable to the verge of bankruptcy in 2000, as it tried to recoup £1.5 billion by stopping paying terminal bonuses and closing to new policyholders.
Equitable is suing E&Y for up to £2.05 billion and 15 of its former directors for up to £1.7 billion, in a trial expected to last 9 months, cost over £80 million.
The case mark's the first full examination of non-executive directors' duties by an English court and it has sent directors' liability premiums soaring as boards across Britain, shaken by Equitable's action, seek better cover.