If your company has any London market insurance policies in its portfolio of current or historic insurance policies, then your company needs to be prepared to protect those assets. A solvent scheme of arrangement is a process utilized in the United Kingdom to compromise the insurance contract between a solvent insurer and its creditors, particularly the solvent insurer’s policyholders. It’s a way for a solvent insurance company to exit the insurance market and cut off all future claims which may someday be presented to policyholders. It can involve all, or only a part, of the solvent insurer’s book of business. The scheme is binding on all creditors if a majority of the creditors or classes of creditors vote for the scheme and the scheme is sanctioned by the English High Court. Many U. S. companies are not voting and this is permitting solvent schemes to pass. Moreover, in some instances, even when U.S. companies are voting against the solvent schemes, the votes are devalued by the scheme administrators and this permits the scheme to pass. Solvent schemes of arrangement have a profound impact on U.S. companies that purchased London market insurance policies with the expectation that the coverage would be there for future liabilities. Under solvent schemes of arrangement, the insurance coverage is commuted and most policyholders do not receive fair value for the commutation of their coverage.
When seeking to enter into a solvent scheme of arrangement, the insurance company is required to provide notice to its policyholders and creditors and seek their vote either for or against the scheme. Many times, when companies receive a letter announcing a proposed scheme, they set the letter aside. The letter should not be set aside. Instead, the company should determine whether it has any of the insurance coverage that is proposed for the scheme. To do that, the company should gather all of its historic insurance coverage, including the coverage for any companies it acquired over the years, and evaluate the coverage to determine what London market insurance carriers participated on the coverage. Having the information in a database and on an insurance coverage chart is not only helpful, it’s critical. SandRun Risk can assist companies in locating its insurance policies, as well as analyzing and organizing the coverage in a format that will allow companies to evaluate their coverage upon receiving the proposed scheme of arrangement letters. Next, the company needs to have a good handle on its current and historic claims, as well as an actuarial report of future claims. Finally, if a company intends to raise objections to the proposed scheme, the company will need to be prepared to hire both coverage counsel in the U.S. and the U.K. If the company does nothing, or does not raise objections to the scheme, the company risks not only losing the coverage forever through the scheme, but risks receiving a future claim from its’ shareholders for failure to protect the company’s assets.
Solvent schemes of arrangement cannot be taken lightly by U.S. companies. More and more London market insurance companies are utilizing the solvent schemes process to the detriment of policyholders. U.S. companies need to be prepared to respond to solvent schemes of arrangement by knowing their insurance coverage and their claims. SandRun Risk can help.