APRIL 2005
Insurance Coverage
Issues Arising From the Recent Trend of Solvent
London Insurers Proposing Schemes of Arrangement
That Include Bar Dates
INTRODUCTION
BACKGROUND ON SOLVENT SCHEMES
Two solvent London insurers—Sphere Drake Insurance Company Limited (“Sphere Drake”) and Mercantile & General Reinsurance Company Limited (“Mercantile”)—will hold Creditors’ Meetings in April 2005
for the purpose of voting on proposed Solvent
Schemes of Arrangement (“Solvent Schemes”). Notwithstanding the fact that Sphere Drake and Mercantile are solvent, their proposed Solvent Schemes include bar dates by which policyholders must file all
claims, including contingent and Incurred But Not
Reported (“IBNR”) claims. Moreover, the insurers
have announced that they will seek a permanent injunction from a bankruptcy court in the United States
to prohibit policyholders from continuing or commencing any litigation against the insurers.
A Scheme of Arrangement is essentially a contract that
is binding on the insurer and all of its creditors that
governs how the insurer will handle and resolve
claims. Since the mid-1990s, numerous insolvent
London insurers have adopted Schemes, including the
KWELM companies, Andrew Weir, English & American, and Orion. In the past year or so, numerous solvent London insurers in run-off (generally, insurers
that are solvent but who no longer issue new policies)
have proposed or announced their intention to propose Solvent Schemes with bar dates. For example,
Ludgate Insurance Company and Prudential Assurance Company Limited obtained creditor and court
approval for so-called Solvent Schemes that included
bar dates in 2004. While Scheme Administrators of
insolvent London insurers pay some fraction of settled
claims, the Solvent Scheme Administrators generally
will pay 100% of settled claims.
The proposed Solvent Schemes of Sphere Drake and
Mercantile reflect a trend among solvent London insurers in run-off to move toward schemes with bar
dates. This trend has sparked a considerable amount
of controversy in the policyholder community. For
example, it has been reported that a substantial number of policyholders recently voted against the proposed Scheme for British Aviation Insurance Company Limited (“British Aviation”) at a Creditors’ Meeting in March 2005. The fate of British Aviation’s proposed Scheme remains uncertain.
In sum, policyholders should be aware of this trend
and should carefully evaluate the Solvent Schemes
in light of their unique claims history and coverage
program.
There are numerous other Solvent Schemes in the
pipeline, including Sphere Drake and Mercantile.
Sphere Drake is holding a Creditors’ Meeting to vote
on its proposed Scheme on April 19, 2005. Policyholders who wish to vote on the Scheme must submit
a Form of Proxy and Voting Form in advance of the
meeting. An Explanatory Statement and the proposed
Solvent Scheme are available at www.sdopoolssolventscheme.co.uk. If the Solvent Scheme is approved, it is expected that the bar date for filing claims
will be September 5, 2005.
Kirkpatrick & Lockhart Nicholson Graham LLP
Mercantile is holding a Creditors’ Meeting on
April 26, 2005. If approved, Mercantile anticipates a
bar date for filing claims in October or November
2005. Copies of the Scheme and Explanatory Statement can be found at www.mgre.co.uk.
As a general matter, in order to implement a Solvent
Scheme, the relevant insurer must obtain approvals on
three levels: (1) first, they must obtain the approval of
a super-majority of all known creditors; (2) second,
they must obtain the approval of an English court supervising the so-called Solvent Scheme; and (3) third,
they must seek and obtain a permanent injunction
from a bankruptcy court in the United States to prohibit any litigation against the insurer. For example,
Sphere Drake has stated that “an application will be
made in the United States of America pursuant to Section 304 of the United States Bankruptcy Code for a
permanent injunction restraining Scheme Creditors in
the United States from proceeding against the Company in relation to Scheme Liabilities in that jurisdiction and relying instead on the provisions of the Solvent Scheme for such liabilities to be met in full.” See
Explanatory Statement Relating to a Proposed Solvent Scheme of Arrangement for Sphere Drake, at 17
(available at www.sdopools-solventscheme.co.uk).
DISCUSSION
It appears that there is a growing sense of unease
among certain policyholders with respect to Solvent
Schemes. For example, at the Creditors’ Meeting concerning the proposed British Aviation Solvent Scheme
on March 15, 2005, a substantial group of policyholders sought to oppose the proposed Scheme. British
Aviation has reported the following on its website:
The votes cast at the meeting are now being reviewed. A number of votes (both for
and against the Scheme) are not considered reasonable by the Company and will
be reviewed by the Chairman in accordance with the English court order of 18
January 2005. The Chairman will determine a reasonable value to be put on disputed claims for voting purposes only.
Once the Chairman has completed his review the result of the creditors’ vote on the
Scheme will be reported to the Court and
published on this website.
2 APRIL 2005
See www.baicsolventscheme.co.uk (posted as of
April 5, 2005).
As noted above, each policyholder should evaluate
the so-called Solvent Schemes based on their unique
facts and circumstances. Insurers have identified several purported advantages to the Solvent Schemes, including the following:
■
Early Payment (noting that Scheme Creditors may
receive payments “sooner than if the run-off of the
Scheme Business were to continue until all claims
matured and were paid in the ordinary course”);
and
■
Simplified Claims, Agreement Process (noting that
disputes concerning the valuation of IBNR claims
will “be referred to an independent Scheme Adjudicator for resolution in what is intended to be a fair
and efficient manner”).
See Explanatory Statement Relating to a Proposed
Solvent Scheme of Arrangement for Sphere Drake, at
7. Based on such factors, certain policyholders may
wish to support the Solvent Schemes, particularly if
they are in a position to support substantial IBNR
claims because they potentially may collect money
now under the Schemes based on estimates of future
claims that they otherwise would not collect for many
years.
On the other hand, policyholders also should consider
the following factors:
■
Notwithstanding the fact that the occurrence-based
policies at issue never expire, policyholders would
not be able to file claims after the bar date, even if
they were unaware of the claims before the bar date.
■
There is uncertainty concerning how the Scheme
Administrators will value IBNR claims, particularly
for policyholders that may have just recently become involved in asbestos-related lawsuits. More
specifically, there is uncertainty whether the
Scheme’s actuaries will limit their analysis to projections based on existing claims data or whether
they will consider other factors.
■
There is uncertainty whether the pre-appointed
Scheme Adjudicator will resolve disputes in a fair
manner.
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
■
There is uncertainty whether Scheme Administrators will otherwise handle claims in a fair manner,
given that policyholders arguably lose the threat
of suing the insurer if a settlement is not reached
or the insurer acts in bad faith.
Gregory S. Wright
gwright@klng.com
202.778.9250
Julia Reynolds Johnson
To the extent a policyholder decides to oppose a
Scheme, it may mount its opposition at several stages
in the process, including the creditor vote stage, the
English court stage, and the United States bankruptcy
court stage.
jjohnson@klng.com
202.778.9227
Gregory S. Wright is a partner and Julia Reynolds Johnson is of
counsel in the Washington, D.C. office of the law firm of
Kirkpatrick & Lockhart Nicholson Graham LLP. They regularly
counsel policyholders with respect to a wide variety of
CONCLUSION
insurance coverage claims, including claims against insolvent
As noted above, the upcoming votes on proposed
Solvent Schemes for Sphere Drake and Mercantile illustrate the issues presented by this developing trend
of solvent London insurers proposing Solvent
Schemes with bar dates. Battlelines are being drawn,
and policyholders should carefully stake their positions on these issues.
London insurers. The views expressed in this Alert are not
3 APRIL 2005
necessarily those of Kirkpatrick & Lockhart Nicholson Graham
LLP or of its clients.
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP
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lawyers have authored Policyholder’s Guide to the Law of Insurance Coverage and edited the Journal of Insurance Coverage. For further information, please consult our website at www.klng.com.
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