Insurer Chartis will be given a temporary reprieve from paying $5.5 million to financial intermediary Local Government Financial Services (LGFS) after fellow defendant Standard & Poor’s (S&P) indicated it will appeal a landmark Federal Court ruling over toxic investment products.

The world-first ruling last week found in favour of 13 NSW councils in their claim to recover $16 million lost in complex synthetic derivatives known as “Rembrandt 2”, Castle finance or Chess notes rated AAA by S&P, arranged by ABN Amro and sold by LGFS between 2006 and 2008.

Justice Jayne Jagot found a “reasonably competent ratings agency” could not have given the constant proportion debt obligations a Triple-A investment rating. He said AMB Amro misrepresented facts to S&P and LGFS had “buried all mention of risk in the fine print”.

As the professional indemnity (PI) insurer for LGFS, Chartis is liable to pay $5.5 million, or a one-third share of the losses incurred by the 13 councils. 

However, S&P has indicated it will appeal the judgement and a spokesman from the Royal Bank of Scotland, which took over parts of ABN Amro in 2007, said the group will study the “long and complex judgement” before deciding whether to appeal.

Payments under a PI policy are normally suspended pending a final court appeal. LGFS must also show it hasn’t breached the usual PI exclusions covering criminal conduct and gross negligence.

A Chartis spokesman told insuranceNEWS.com.au the company can’t comment because the case is subject to an appeal. The spokesman also said Chartis reviews all PI wordings as a matter of course.

It is not known which insurers provide PI cover for S&P and RBS, or if they have PI cover at all.

John Walker, the ED of litigation funder IMF Australia, flew to Europe last weekend to examine the possibility of launching similar actions in Germany, France, the UK and the Netherlands.

Mr Walker says constant proportion debt obligations worth at least €1.5 billion ($1.84 billion) were issued in Europe prior to the credit crunch.

IMF has also launched a follow-up class action against S&P and Royal Bank of Scotland on behalf of Muswellbrook Shire Council and an undisclosed number of other councils. The litigation was launched in the Federal Court in September.