Bermuda: Bermuda Protection Of Policyholders: Legal Reform On The Horizon

Last Updated: 3 July 2017
Article by Nick Miles

The Bermuda Monetary Authority ("BMA") has published its second Consultation Paper on the subject of "Policyholder Protection" (dated June 2017). The Consultation Paper restores to the agenda the questions whether legislation should be introduced protecting policyholders in the event of failure of an insurer registered under the Insurance Act 1978 (the "Insurance Act"), and if so what form it should take. The proposal has laudable objec­tives but may need technical refinement to be workable. Interested persons have until 14 July 2017 to provide feedback. The proposal applies to all insurers registered under the Insurance Act (that is, commercial insurers, captive insurers and special purpose insurers), whether the insurer carries on long-term business or general business. It applies to the insurer's obligations to reinsurance policyholders as well as its obligations to direct insurance policyholders.

Many jurisdictions make specific provision for the protection of policyholders on insurer failure, whether by statutory priority of debts or a policyholder protection scheme, or both. As yet, Bermuda has no such regime applicable to insurers generally. The International Association of Insurance Supervisors regards the existence of a legal framework that affords priority to the claims of policyholders in a liquidation of an insurer as among the criteria of a sound regulatory and supervisory regime. In keeping with its position as a leading supervisor of insurance, the BMA has proposed amendments to the statutory priority of creditors' claims in a winding up of an insurer.

As things stand, in the winding up of a company under the Companies Act 1981 ("Companies Act"), whether or not the company is registered as an insurer under the Insurance Act, the claims of creditors of the company are ranked, subject to the earmarking of any long-term business fund of the insurer for the payment of long-term business liabilities, in the following order:

1 secured creditors with fixed charges enforce their security outside the liquidation, but essentially in priority to all other creditors;

2 the costs and expenses of the liquidation;

3 debts due to employees located in Bermuda under section 33(3) of the Employ­ment Act 2000;

4 "preferential payments" to preferential creditors pursuant to section 236(1) of the Companies Act 1981, including unpaid taxes under the Taxes Management Act 1976, unpaid social insurance/Government pension contributions under the Contributory Pensions Act 1970, liability for compensation under the Workmen's Compensation Act 1965, and payments of up to $2,500 due to employees resident outside of Bermuda;

5 debts secured by a floating charge (although higher priority debts must be paid out of any property secured by a floating charge if the assets of the company are not otherwise sufficient to meet them pursuant to section 236(5) of the Companies Act 1981);

6 unsecured creditors' debts;

7 post-liquidation interest on unsecured creditors' debt claims; and

8 debts due to shareholders in their capacity as such.

Each category of debts must be paid in full before payment of creditors in the subsequent category. Creditors in the same category rank equally among themselves.

In its Consultation Paper, the BMA proposes changes to the Insurance Act that dis-apply section 236 of the Companies Act (referred to in paragraph 4, above) in a winding up of an insurer, and that introduce a new waterfall of preferential payments. In particular, instead of:

(a) confining the range of "preferential payments" to the categories identified in paragraph 4 above; and

(b) giving parity to all such debts, so that preferential creditors rank equally among themselves in respect of preferential payments;

the BMA proposes to add certain insurance debts to the range of preferential payments and to introduce an internal "waterfall" within the category of preferential payments, as follows:

(i) pension contributions under the Contributory Pensions Act 1970;

(ii) wages or salary due to employees due to employees resident outside of Bermuda;

(iii) accrued holiday remuneration due to employees due to employees resident outside of Bermuda;

(iv) all amounts due to policyholders of any contract of insurance (excluding prepaid premium amounts);

(v) prepaid premium amounts made by a policyholder prior to inception of a contract of insurance;

(vi) unpaid taxes including under the Taxes Management Act 1976; and

(vii) compensation under the Workmen's Compensation Act 1965.

The changes would not affect the priority given to debts in categories 1 to 3, above (fixed charge-holders, employees located in Bermuda, liquidation costs), which will continue to rank ahead of preferential payments.

As the BMA notes in its Consultation Paper, given the infrequent incidence of insurer failures in the jurisdiction, the exacting nature of the prudential standards applicable under Bermuda's supervisory regime, and the predominantly wholesale character of the business written by Bermuda insurers, the establishment of a statutory priority in a winding up of an insurer should give sufficient protection to policyholders and is not unduly burdensome on the industry.

The BMA has prudently proposed that the priority of insurance debts should apply to both direct insurance and reinsurance claims (in other words, that there should be no priority of insurance debts over reinsurance debts). Given the large volume of reinsurance business written in Bermuda and the predominance of large, commercial clients, this is obviously appropriate.

While the balance that the proposal strikes between the need for policyholder protection and the interests of the industry is laudable, the BMA's proposal may need to be adjusted in order to address the following issues:

  • The BMA has not explained how if at all the balance of section 236 of the Companies Act will apply to insurers being wound up under the Companies Act. Thus, the remainder of section 236 covers various matters, such as a sub-limit on preferential payments of wages or salary, restriction of preferential Workmen's Compensation Act payments taking a form of periodic payments, the respective ranking of preferential debts between themselves (under the Companies Act, they have parity with each other, but the BMA's proposal is to apply a waterfall within the class of preferential debts), and the ranking of preferential debts over the claims of floating charge-holders. The BMA's proposal will need to explain the interplay with these matters.
  • The proposal does not explain the relative priority of the claims of holders of debentures secured by, or holders of, any floating charge created by the insurer. Under section 236(5) of the Companies Act, preferential payments have priority, so far as the assets of the company available for payment of unsecured credi­tors are insufficient to meet them, over the claims of floating charge-holders. Assuming the same structure applies the BMA's restructured category of prefer­ential payments, the BMA's proposal would have the quite bold result that the claims of floating charge-holders are postponed until all policyholder creditors of the insurer have been paid in full. This would rob a cedant with a floating charge over an insolvent reinsurer's assets of the security for its debts in the winding up of the reinsurer, the secured assets being made available for the payment of insurance debts generally (not just those of the cedant). To be fair, as noted above, it is not clear that section 236(5) of the Companies Act will apply to the BMA's proposal, but if it does not, then the BMA needs to confirm what replaces that section.
  • It does not explain how the preferential payments waterfall is to be applied where the insurer is a composite insurer. For a composite insurer, one would expect there to be two classes of preferential payments, those attributable to the long-term business of the insurer and those attributable to the general business of the insurer, with any surplus assets attributable to either business to be available to pay any preferential payments not satisfied out of assets attributable to the other business.
  • It confines the insurance debts with preferential status to the claims of "policy­holders". This term is liable to create confusion. For example, it is not wholly clear that it includes persons who are not designated "policyholders" under a contract of insurance but who nevertheless have the legal right to claim or benefit under the policy. Additionally, it may not encompass persons with independent direct rights against the insurer under foreign statute.
  • It is not clear why preferential refunds of premium should be confined to advances paid prior to inception. Why should refunds of "time off risk" premium under cancelled policies not enjoy a similar priority?
  • The subordination of claims for refunds of premium to claims for policy proceeds may cause unfairness in some contexts. For example, some contracts of long-term insurance business have a surrender value on termination of the policy, essentially involving return of premium. It may be unfair that the rights of creditors proving in respect of surrender value should be postponed until those proving in respect of policy proceeds have been paid in full.

A simpler solution (the equivalent of which as has been adopted in other jurisdictions, such as the United Kingdom) may be to leave the category of preferential payments under section 236(1) of the Companies Act unchanged and interpose insurance debts as a category that is subordinate to preferential payments and senior to the claims of general unsecured creditors. This would have the advantage of retaining the sub-limits on prefer­ential payments imposed by subsequent provisions of section 236 of the Companies Act, including the clarification that the claims of floating charge-holders are subordinate to pref­erential payments but senior to insurance debts. Of course, this would stymie the BMA's objective of an internal priority of preferential payments, with overall priority to pension contributions. However, it would make the overall proposal of policyholder protection considerably clearer and easier to implement.

The BMA has signalled that restructuring the liquidation waterfall is just the initial stage of its consultation on insurer resolution, and that other issues will be examined in future consultations. Whether this will include consultation on formal insolvency procedures alternative to winding up, such as administration, is not yet clear.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.