UK: Latest Developments In Legacy

Last Updated: 30 July 2008
Article by Jon Yorke and Kiran Soar

The developments that will be of interest to those dealing with legacy portfolios are: 1) the Reinsurance Directive and European wide Part VII transfers; 2) HM Treasury response in relation to extending the ambit of Part VII transfers; and 3) the Scottish Parliament's reaction to Grieves v F T Everard & Sons (2007) which held that pleural plaques were not compensatable.

The Reinsurance Directive

In December 2007, the European Reinsurance Directive came into force. The Directive provides for each European Member State to enact a 'Part VII' equivalent portfolio transfer mechanism into their local law.

Such a mechanism has been available in the UK for many years. Germany was one of the first continental European states out of the blocks and it now allows portfolio transfers to other authorised reinsurers in the EU. The first such transfer took place earlier this year where Deutsche Ruck transferred two books of discontinued reinsurance business to their London subsidiary. It is reported that the German transfer mechanism offered several advantages to Deutsche Ruck over the equivalent UK Part VII mechanism; in particular, policyholders were not entitled to be notified, nor was there any need for an independent expert's report, advertisements or court approval.

This transfer paves the way for future transfers, particularly where the aim is ultimately to enter into a Scheme of Arrangement. Schemes have proved popular in the UK as providing an effective tool to achieve finality. The UK is the only experienced jurisdiction to allow Schemes of Arrangement.

HM Treasury consultation

In November 2006, HM Treasury issued a consultation paper seeking views on a number of issues, including whether to:

  1. clarify the existing law as to whether the court could override contractual provisions which might otherwise void or affect the transfer, particularly as regards reinsurance arrangements; or

  2. extend the Part VII regime to all former Lloyd's members.

The Treasury's response on 14 April 2008 recommended clarifying the law to make it clear that the court had the power to "order the transfer of reinsurance contracts taken out on the risks being transferred where it considers it appropriate in all the circumstances". This, of course, has a significant impact upon reinsurers, many of which have contracts which allow for a specific course of action in the event their cedant chooses to enter into a Part VII transfer. The Treasury did recognise reinsurers had "legitimate interests in the identity of transferee" and therefore proposed detailed statutory notification provisions to safeguard reinsurers' interests. The Treasury also decided that all Lloyd's Names (not just post-1996 Names) should be entitled to transfer their liabilities. This will now pave the way for the second stage of the Berkshire Hathaway/Equitas deal to proceed, which envisaged a Part VII portfolio transfer of the 1992 and prior Lloyd's Names' liabilities to Berkshire Hathaway.

Pleural plaques

In Johnson v NEI Internal Combustion (2007), the House of Lords held that pleural plaques were not compensatable. Pleural plaques is a scarring of the lungs, but it was held that they caused no symptoms, did not increase susceptibility to other disease or shorten life expectancy, and had no effect on health.

The decision proved unpopular with certain groups and there has been lobbying to see if the Government will reverse the decision. This has been successful, at least in Scotland. On 23 June 2008, the Scottish Parliament published the Damages (Asbestos-related Conditions) (Scotland) Bill, which reverses the House of Lords' decision. The Bill provides that pleural plaques are a material personal injury capable of founding a claim in damages (as well as confirming that pleural thickening continues to be compensatable).

Things are different over the border. On 9 July 2008, the UK Government published a Consultation Paper to determine the most appropriate way to support people with pleural plaques. In doing so, the Government has signalled that it will not easily reverse the House of Lords' decision. Indeed, the Paper indicates that the Government would require strong reasons to do so, given the unanimous decision by the Lords on complex issues of law. The Consultation ends on 1 October 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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