United States: Policyholders Beware: Another Insurer Bites The Dust—Or Seeks Permission To Do So

Last Updated: October 7 2015
Article by   Orrick

The universe of insurers still available to pay long-tail liability claims (e.g., asbestos, pollution, and other health hazards) is getting smaller every year. Significant domestic insurers like The Home, Midland and Mission declared bankruptcy years ago. Significant London Market companies continue to fade away, depriving policyholders with historic London Market policies of the opportunity to fully collect upon claims made and satisfied under those policies.

On October 28, a United Kingdom court will hold a hearing regarding whether to approve an amended scheme of arrangement involving certain London Market companies that are currently in "run-off" (meaning their only function is to pay claims until their assets are gone). The proposed amended scheme would "crystallize" these companies' liabilities. If the amended scheme is approved, a "bar date" will be set after which, subject to certain exceptions, policyholders will not be able to submit new claims against those companies. The particular London companies seeking this new status are The Orion Insurance Company plc, Ralli Brothers Insurance Company Limited, The London and Overseas Insurance Company plc, and Hull Underwriters' Association Limited (collectively, the OIC Run-Off Companies).

A crystallized scheme of arrangement can be a good or bad thing for a creditor-policyholder, depending on that creditor's perspective. A policyholder that has submitted a claim by the bar date stands to collect more, whereas a policyholder that misses the bar date stands to collect less (indeed, usually nothing). What you know and when you know it matters a lot. The main advantage to policyholders is that the claims included in the scheme typically will be paid at a higher value, largely because (1) no funds will be allocated to claims made after the bar date, and (2) the administrative costs to manage run-off are less as the company's affairs wind down at an earlier date than if the company continued in run-off. Illustratively, the OIC Run-Off Companies will either pay out all claims in the next 2 to 3 years or the next 20 to 30 years. The administrators of the proposed OIC Run-Off Companies scheme say that the difference is likely to be a payout of 71% of agreed claims if the scheme runs its course as compared to 78% if the amended scheme is sanctioned. This can be a big difference for policyholders with large agreed claims.

For those who submit claims before the bar date, another advantage is that claims will be paid earlier, maximizing the time value of money paid to them.

On the other hand, for the policyholders that miss the bar date—even policyholders with otherwise valid claims under historic London policies—the future is less rosy. If these policyholders miss the deadline, they generally will be paid nothing. In addition, policyholders who are aware of the bar date but do not have valid claims as of that date likewise are out of luck. Some policyholders who submit by the bar date complain that their claims will be undervalued, as circumstances may transform a seemingly small claim into a large one over time. This is not the result policyholders expected when they bought occurrence policies with no deadline for submitting a claim.

There is especial controversy about whether London Insurers should be permitted to crystallize when the companies are solvent. In a solvent scheme, arguably it is the scheme company—not the policyholder creditors—that primarily benefits from the scheme. Unlike an insolvent scheme in which all of the company's assets are divided among its creditors, in a solvent scheme the company's assets are sufficient to cover its anticipated liabilities and the surplus goes back to the company's shareholders. Thus, while policyholders may recover nothing (if they do not submit a claim by the bar date) or an undervalued amount (on future estimated claims), the company's shareholders retain the funds the company in theory would later owe policyholders. Again, this is not the result for which policyholders bargained. For further discussion of a solvent scheme, see the court's judgment in In the Matter of The British Aviation Insurance Company Limited. Notably, the OIC Run-Off Companies are insolvent and the proposed amended scheme includes an opt-out provision for certain classes of policyholders with claims financially guaranteed by a third party.

The takeaway is that policyholders with historic London market coverage need to keep abreast of London companies' schemes of arrangement so that they can exercise their rights to vote on the issue (if they seek to sanction or defeat a scheme) or to submit claims, if any, prior to a bar date.

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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