London insurance companies 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. 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.
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. Insurers 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.
Some policyholders who know their amounts can immediately settle all their claims, but those that are not sure how much their future claims will be are forced to estimate them.
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 subsidiaries. Opposing creditors maintained the court lacked jurisdiction to approve a scheme, which improperly placed creditors with substantially different rights 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.
According to attorneys, the court’s decision could have substantial consequences. Pending schemes structured similarly to the BAIC scheme may need to be reconfigured or withdrawn. It can also be expected that U.S. policyholders may be more active in opposing similar schemes in the English court.
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