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XL charged with breach of contract

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Last week, California-based automaker – Fisker Automotive, filed a lawsuit against XL Group Plc (XL - Free Report) for the infringement of the pledged insurance coverage.

XL Insurance America Inc.’s policy contract with Fisker compels it to pay a maximum $100 million of coverage for losses incurred from catastrophes including hurricanes like Sandy. However, Fisker alleged that despite putting in a timely claim recently, XL denied the automaker any reimbursements as previously agreed in the mutual contract. Hence, Fisker decided to sue XL and filed a complaint in the New York Supreme Court.

In October this year, Super Storm Sandy supposedly caused a $33 million loss to Fisker by destroying 338 of its plug-in hybrid electric cars (Karma) at its shipping facility in Port Newark, New Jersey. The newly designed and manufactured cars were waiting to be traded to different parts of the country. However, the flood is said to have submerged the vehicles in more than 5 feet of seawater.

The conflict between the two companies is said to have started on two fronts – firstly whether the cars were at all awaiting shipment and secondly, regarding the terms of the contract. Conversely, XL defends itself believing that prior to the breach of the contract,   Fisker faced a number of hindrances with the launch of Karma from its financial operations and quality control. Now, with the advent of Sandy, it said the company faced even more problems and ultimately blamed XL for not paying the insurance coverage. If Fisker is proved to be true, it might help Fisker recover its losses.

Fisker alleged XL violated the deal and is expecting a court order on its behalf that would mitigate its losses incurred from Sandy as also compensate for breaking the contract by XL along with other remedies.
If proved guilty, the litigation issues on XL may pull down investor confidence. Moreover, XL previously had provided its pre-tax loss estimate from Sandy to be $ 350 million. This loss along with the compensation to Fisker, may hamper the financials for XL.

Overall, Superstorm Sandy is projected to have damaged more than 10000 vehicles at the New Jersey facility, many of which belonged to Toyota Motor Corporation (TM - Free Report) . The industry loss from Sandy is expected to be more than $25 billion and hence, poses to be the second most expensive U.S. catastrophe after Hurricane Katrina.

XL shares deteriorated 10 cents to $24.69 on the New York Stock Exchange on the date the case was filed. XL reported earnings of 61 cents in the third quarter of 2012. The Zacks Consensus Estimate for the fourth quarter of 2012 is a loss of 32 cents representing a year-over-year decline of 29.9%.

XL currently holds a Zacks #3 Rank translating into a short tern Hold. Other insurers like Axis Capital Holdings Limited (AXS - Free Report) and ACE Limited also share the same Zacks Rank.

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