Smith & Nephew takes £80m hit over faulty knees

Smith & Nephew's insurers are refusing to cover the cost of surgery to replace hundreds of faulty artificial knees, claiming that the FTSE 100 medical devices company misled them.

Smith & Nephew's insurers are refusing to cover the cost of surgery to replace hundreds of faulty artificial knees, claiming that the FTSE 100 medical devices company misled them.

Sir Christopher O'Donnell, chief executive, admitted yesterday that S&N would be forced to take an £80m charge against profits this year as a result of the dispute.

The company has previously insisted that its insurance coverage was sufficient, but two out of its seven insurers have refused to pay out.

"It is very concerning that two insurers have now declined coverage at this late stage," Sir Christopher said. "We will take all steps available to us to enforce this coverage."

S&N is assuming now that it has to meet all the remaining costs of corrective surgery and compensation for patients. An accounting charge of £80m will be taken against full-year results previously expected to show a profit of about £280m.

A little less than 3,000 knee replacements were made using the product, most of them in the US. So far, 676 have been replaced and the company is assuming the final total will be about 1,200. The faulty knee has an unusual knobbly surface which, it was hoped, would help it bind to the patient's bone. However, in some cases - and for reasons the company still does not understand - it becomes loose and painful.

Sir Christopher said two insurers had written to S&N last Friday to signal their refusal to pay out on their product liability policies. They claim S&N left out important information in the company's presentation to them in summer 2002.

"It is too early to say when this might be resolved," Sir Christopher said.

The one-off charge comes as a late blow to S&N, whose third-quarter results last month finally convinced a sceptical City that it would be able to meet its profits forecasts for the year.