1 August 2005
Business Insurance
Business Insurance
(Oct 2007) Ruxley in landmark reinsurance-funded acquisition(Apr 2007) Ruxley in Generali run-off talks(Autumn 2006) Part VII business transfers - adding flexibility to the run-off equation(Spring 2006) Why we need a scheme monitor(Spring 2006) BAIC and after(Feb 2006) Solvent Schemes of Arrangement Conference(Nov 2005) Scheming for solvency(Oct 2005) A wake-up call(Sept 2005) Time To Wake Up(Sept 2005) Free Audio Conference: Rating the Raters(Aug/Sept 2005) Air Your Views(Aug 2005) Ruling could curtail solvent runoff schemes(March 2005) Tackling The Pools(Spring 2005) Selling like hot cakes(Spring 2005) The scheming solution(28/02/05) Influx of capital can impact premiums(Feb 05) Bringing finality to underwriting pools(Winter 04) Dangerous waters(04/11/04) Solvent schemes offer real boost(01/09/04) Buying Run-off(05/07/04) Run-off moves to another level(03/02/04) Run-off on a positive note(2004) 2003 A year of innovation(Winter 03) Ruxley buys Aviation & General(06/10/03) Ruxley takes whole of A&G(04/07/03) End of asbestos saga?(03/07/03) Ruxley closes APH book(Summer 03) Vulture Culture?
The ruling should end a practice that can be unfair to policyholders with long-tail liability claims, they say.
The proposed solvent scheme by British Aviation Insurance Co. Ltd. was "pernicious and contrary to the whole purpose of liability by closing its book of business just as the claims began to emerge," said William Greaney, a partner at Covington & Burling in Washington, which represented the policyholders.
Advocates of the process, however, say that, with some adjustments, solvent schemes may still be used by insurers to run off individual books of business more efficiently than conventional runoff arrangements.
The ruling, which the judge in the case said may be the first time a solvent scheme has been blocked, will prevent London-based BAIC from rapidly running off the business it sought to have covered by the scheme.
Schemes of arrangement for several years have been used by U.K. insurers as a means of running off business without placing a company in liquidation. Advocates of the process say that schemes of arrangement avoid delays and costs associated with lengthy liquidations.
More recently, solvent schemes of arrangement have been used to run off individual books of business so that all liabilities for smaller slices of insurers' business can be ascertained or estimated and paid off more quickly. A key component of the process is the estimation of losses from liabilities that have already occurred but which policyholders have not reported to their insurers.
London-based BAIC was seeking to use a solvent scheme of arrangement to run off mainly long-tail products liability business it had written in the United States and Canada between 1930 and 1991.
BAIC sought court approval to set up the plan after creditors, which include both policyholders with accrued claims and policyholders with incurred-but-not-reported claims, voted against its inception.
The proposed court approval was opposed, however, by several U.S. policyholders, including Goodrich Corp., The Goodyear Tire & Rubber Co. and Textron Inc.
The policyholders argued, among other things, that their incurred-but-not-reported claims should have been placed in a separate class from the accrued claims and that their claims had not been properly valued by the plan.
High Court judge Mr. Justice Lewis on ruled that the plan proposed by BAIC, which went into runoff in 2002, was "unfair."
According to the ruling, "the most powerful consideration is that it seems 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."
U.S. policyholder attorneys welcomed the ruling.
Robert Horkovich, a lawyer at New York law firm Anderson Kill & Olick P.C., said that the judge's decision was "hailed as a good thing for policyholders and policyholders that face future IBNR claims."
Laurence Eisenstein, a partner at Washington-based law firm Eisenstein Malanchuk L.L.P., said he would be "happy to see the death" of such plans. "They are a dangerous development and it is entirely speculative to protect long tail exposures in a solvent scheme of arrangement. Potentially it is inappropriate because it impairs the rights of untold numbers of policyholders to recover from an old insurance policy."
Mr. Eisenstein said that if the company is insolvent, then it is appropriate to use conventional run off procedures, whereby insurers assess and pay claims as they arise over time.
Marc Mayerson, an attorney at Washington-based law firm Spriggs & Hollingworth said that "significantly, the ruling invalidates solvent schemes of arrangement because it unfairly forces policyholders to liquidate unknown asbestos and other health hazard claims that may or may not come to fruition."
But Geraldine Quirk, assistant solicitor in the corporate insurance group at London-based law firm Clyde & Co., said that it may be possible to make modifications to solvent schemes to ensure that they obtain court approval.
For example, the plans could be established with a provision that would allow IBNR claimants to vote as a separate class, she said.
In addition, there will likely be a greater focus on the methodologies used to estimate claims, Ms. Quirk said. "Companies may rethink this and give stronger guidelines." The plans could require an independent adjudicator to decide the value of the claims.
To comply with the ruling, future solvent schemes may also need to treat insurance policyholder claimants differently from cedent insurer claimants, because cedents are generally more familiar with actuarial valuations, said John Winter, chief executive of Ruxley Ventures Ltd., a London-based run off specialist.
But the need to treat IBNR claims as a different class of claim from others, and for policyholders to be treated differently from cedent insurance companies, or to be excluded from solvent schemes of arrangement altogether, will make the structuring of future solvent schemes of arrangement more complex, Mr. Winter said.
IBNR claims and accrued claims are inexorably linked so that it is not logical that they should be treated separately, he said.
Dan Schwarzmann, a partner in the London office of PricewaterhouseCoopers L.L.P., the company that arranged the solvent scheme for BAIC, said that schemes are "always evolving."
"We will, going forward, explain in more detail how the various aspects of the schemes benefit the company and its policyholders because the schemes are a useful mechanism and most U.S. policyholders believe that." Mr. Schwarzmann said.
He added, "we must learn from the judgement, and it would be very interesting to see how lawyers interpret the case."
The judge gave BAIC leave to appeal the ruling. BAIC said through its lawyers at Herbert Smith that it is "disappointed" that the High Court refused to sanction the proposed scheme and is "considering its options."