on a credit default agreement.

In the case, filed in London, Swiss Re said it bought $20 million of credit protection through a credit default swap on Armstrong Holdings in June, 2000 from XL Insurance, a subsidiary of XL Capital in Bermuda.

Credit default swaps are derivative contracts designed to protect the purchaser against the risk that a specific company will default on its debt or declare bankruptcy.

Armstrong World Industries, the major operating subsidiary of Armstrong Holdings, filed for US Chapter 11 bankruptcy seven months after it had created the holding company. Swiss Re attempted to cash in its credit default protection, citing Armstrong's bankruptcy.

XL refused to pay out, saying the entity on which it had sold the protection was Armstrong Holdings, which had not declared bankruptcy. Swiss Re alleges it mistakenly named the wrong entity in the credit default swap documents, and in fact was repeating a common misunderstanding.

Swiss Re said Bloomberg had reported that Armstrong World Industries had changed its name to Armstrong Holdings. But actually Armstrong World had created a new holding company, but continued as an operating subsidiary of the holding company.

In the court filings Swiss Re said that when the error became clear in November it asked for the contract to be changed to name Armstrong World, but XL refused to do so.

Although this dispute centres around the issue of the correct legal name for Armstrong, some credit derivative users say it highlights a bigger problem facing this growing sector, that of poor quality paperwork.

One user in New York said: "It is a relatively new product, and sellers and buyers of credit protection are dependent on the broker/dealers for liquidity.

Maybe because of that the broker/dealers can get a little sloppy with documentation.'' Swiss Re sues XL Users have argued over standardised documentation for credit default swaps since the mid-1990s. Players on both the buy and sell side have said that strides have been made in the past few years in reducing legal documentation disputes. One said: "Although documentation has become considerably more standardised, credit derivative transactions can be complicated.

"We haven't had any problems in the last year with plain vanilla transactions, but we have had a few problems with portfolio deals.'' Stephen Selig, counsel at Baer Marks & Upham in New York, said: "It would seem that there was a mutual mistake of fact, which makes the intention of both parties relevant.'' Traders noted that because Armstrong Holdings has no indebtedness, Swiss Re probably did not intend to buy credit protection on the holding company.

This is not the first time such a dispute has arisen. In February UBS AG filed suit against Deutsche Bank AG for refusing to pay out on a credit default swap linked to Armstrong World Industries. The two settled out of court and did not disclose the settlement terms.