London insurance companies facing asbestos, pollution and other long-tail liabilities to U.S. policyholders that resort to so-called “solvent schemes” to cut off claims and avoid liquidation have been dealt a serious blow.
An English High Court ruling denying such a scheme has raised questions among observers whether future runoffs of this sort will be permitted. The decision was the first time a solvent scheme has been blocked.
Insurers facing liabilities under decades of occurrence policies have increasingly turned to solvent schemes of arrangement allowed under British law to cut off their future liabilities to policyholders. Insurer have been known to utilize these solvent schemes to shutter funds that no longer accept business but are not bankrupt. It allows them to cap their costs.
From a policyholder perspective, the schemes are a mixed blessing. Some policyholders who know their amounts can immediately settle all their claims, but those who are not sure how much their future claims will be are forced to estimate them.
In the first rebuke of a solvent scheme, English High Court of Justice, Chancery Division, Companies Court (Justice Lewison) dismissed a petition to approve such a scheme by British Aviation Insurance Company Ltd., which was attempting to settle asbestos and pollution liabilities.
The BAIC scheme was opposed by a coalition of BAIC’s U.S. policyholders including Goodrich Corporation, The Goodyear Tire & Rubber Co., Textron, Inc., and various of their subsidiaries. They were represented by William F. Greaney of the Washington, D.C. office of Covington & Burling.
Opposing creditors maintained that the court lacked jurisdiction to approve a scheme, which improperly placed creditors with substantially different rights (including policyholders with primarily or exclusively accrued claims and policyholders with primarily incurred but not reported or IBNR claims) into a single voting class.
They also urged the court not to approve a scheme where there were questions about the voting on the scheme and where the scheme lacked a methodology for estimating future claims that provided a clear basis to treat all creditors equally.
The court declined to sanction the scheme because it said it did not have jurisdiction to do so. The court further said it would not do so even if it had jurisdiction because it deemed the scheme inherently unfair.
Writing for the court, Justice Lewison concluded that “the most powerful consideration is that it seems to me to be unfair to require manufacturers who have bought insurance policies designed to cast the risk of exposure to asbestos claims on insurers to have that risk compulsorily retransferred to them. [BAIC] is in the risk business; and [the policyholders] are not.”
According to attorneys, the court’s decision could have substantial consequences given the marked increase during the past two years in the promotion and use of solvent schemes of arrangement by insurance companies as a quick way to extinguish long tail asbestos and environmental claims. Pending schemes structured similarly to the BAIC scheme may need to be reconfigured or withdrawn. It can also be expected that U.S. policyholders, now increasingly aware of the potentially catastrophic consequences of losing their IBNR coverage under such schemes at a time when asbestos and similar claims are escalating against many companies, may be more active in opposing similar schemes in the English court.
Attorney Greaney, who represents U.S. policyholders and coalitions of policyholders in proceedings in the U.S. and abroad, urged U.S. firms to heed the advice in the decision.
“U.S. insureds need to be alert to solvent schemes and their potential to extinguish valuable coverage rights if policyholders don’t act to protect them,” commented Greaney, of the firm of Covington & Burling.
“Notice of a solvent scheme is often inadequate and uninformative, as in this case, and failure to object can enable scheme proponents to force unwanted and detrimental policy commutations on the majority of policyholders based on a vote by a small minority with special interests. The court’s decision shows that these concerns will be listened to if raised, and that policyholders need not sit back and let irreplaceable coverage rights be taken from them to enrich their insurer’s shareholders,” Greaney added.
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