The settlement is the biggest the firm has had to pay in the UK and Ireland, though it is well behind the dollars 400m paid out in an action brought against the US partners over their audit of a number of insolvent savings and loans banks.
It is bound to increase concerns in the profession over a continued rapid rise in lawsuits against firms, which has made professional indemnity insurance increasingly difficult to obtain.
Ernst & Whinney said the payout was being fully covered by its insurers. The lawsuit was against the Irish partners of Ernst & Whinney, which was absorbed into Ernst & Young, whose partners are not affected.
AIB alleged Ernst & Whinney was negligent in its duties as ICoI's auditor, claiming it had failed to discover that the insurer had chronically under-provided for liabilities of Ir pounds 550m accumulated between 1980 and 1983. These figures were not made available to AIB at the time of its takeover of ICoI, 17 months before the collapse.
The High Court hearings had been expected to continue in a specially prepared court in Dublin's Incorporated Law Society for 12 months to two years. Legal costs could have run to Ir pounds 20m had the case, involving 2.5 million separate documents, proceeded.
Many of ICoI's losses were believed to have arisen from the ill-fated insurer's dealings on the London market.
AIB brought its action jointly with Icarom, the company set up to manage the liabilities of ICoI in administration.
But the settlement terms fall well short of the Ir pounds 200m compensation the bank had sought. Icarom had sought a further Ir pounds 350m. With interest the combined compensation could have approached Ir pounds 1bn, and Ernst said the settlement represented less than 8 per cent of the amounts claimed.
The Ir pounds 77m damages will be shared equally by AIB and Icarom.
The events that followed the ICoI takeover led to a crisis of confidence in the entire Irish banking system. The Dublin government had to bail out AIB and, controversially, seek contributions towards the insurer's rescue from other Irish financial institutions.
Gerald Scanlan, AIB's deputy chairman and group chief executive, welcomed the resolution, which he said meant the bank could now focus itself completely on development in Ireland and abroad. AIB shares rose 6p to 274p as a result of the settlement.
The bank said the settlement did not alter agreements with the Irish central bank and the Dublin government under which AIB is contributing to funding the cost of Icarom.
Most large lawsuits against auditors are now settled out-of-court at a fraction of the nominal claims. The biggest cases now pending are by the auditors of Bank of Credit and Commerce International against Price Waterhouse and Ernst & Young. Ernst originally audited part of the BCCI empire, but handed over to PW.
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