By Kim Jae-kyoung
Staff Reporter
Shinhan Bank, the nation’s second largest lender, is expected to file a lawsuit against Meritz Fire & Marine on a $20.8-million refund guarantee (RG) insurance this week, a bank official said Tuesday.
The lender’s unusual move came after the insurer refused the lender’s $20.8-million payment request associated with its RG insurance for the Jinse Shipbuilding failure to deliver to Songa, a Norwegian ship reseller.
RG refers to a guarantee provided by banks in shipbuilding contracts that they will pay back the advance payments made by the ship-buyer in the event that the ship is not delivered in accordance with the contract. In general, shipbuilding contracts call for the builder to provide an advance payments guarantee for any made by a buyer. In this case, banks buy the so-called RG insurance to secure against possible losses caused by the failure of ship delivery.
In 2007, Jinse, a local shipbuilding firm, won an order from Songa, with an advance payment of $20.8 million. Shinhan Bank then provided an RG for the payment.
However, the firm failed to deliver as it underwent a debt-rescheduling program due to a cash shortage. Songa then requested RG issuer Shinhan to pay back the $20.8-million advance payment and the bank accepted the request.
Shinhan, which bought RG insurance from Meritz, then requested that the insurer pay the equivalent to the advance payment, but it refused to do so.
``Since arbitration proceedings on the case were already underway at the request of Jinse, Shinhan should not have paid back the advance payment,’’ a Meritz official said. ``We are now ready to act against Shinhan’s legal action.’’
In January, at the request of another ship reseller, Jinse, after receiving a verbal agreement from the Norwegian company, delivered a ship to the firm that otherwise would have been sent to Songa. But in February, Songa asked Shinhan for repayment of the advance, claiming that there had been no verbal agreement.
A Shinhan official said, ``We went over details of the RG contract and concluded that we had to accept the request from Songa. Otherwise, we believed our credibility could be severely hurt in the international community.
``The exact schedule has yet to be decided but we plan to take the insurer to court this week.’’
Market analysts say that the case is the first-ever legal conflict between a bank and an insurer caused by RG insurance. They expect that a series of similar cases will follow given that local shipbuilders are up for restructuring.