Dissolving Solvent Schemes of Arrangement

Bankruptcy is one option for insolvent companies to manage their obligations to creditors and to provide an efficient mechanism to marshall assets for their benefit; an insolvent insurance company similarly may enter a bankruptcy-like process and pay the claims of its creditors – its policyholders – and marshall its assets (typically reinsurance). Over the past few years, however, we have seen increasing numbers of solvent insurance companies seek to ring fence their liabilities – and lock in profits or at least circumscribe losses – by entering into bankruptcy-like processes by which they forcibly commute their obligations to their policyholders. In 2002, Rhode Island established legislation permitting this type of solvent runoff, but most of the action in this area has been in England for London-market insurers that wrote substantial North American (especially US) risks under broad occurrence policy forms and that now wish to extinguish the long-tail liabilities that naturally follow. Because of a new English decision, however, the ability of London market insurance companies to forcibly terminate their obligations to their policyholders is now in substantial doubt.

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Late Reporting in Claims-Made Policies: Getting to the Root of the Issue

The California Court of Appeal issued an innovative decision that fills in important gaps in the analysis of issues concerning providing notice under “claims made and reported” liability insurance policies. The case, Root v. American Equity Specialty Ins. Co., available at http://caselaw.lp.findlaw.com/data2/californiastatecases/g033818.pdf (Cal. Ct. App. June 28, 2005), involved an insured who faced falling between two stools: not having coverage under consecutive liability policies because the claim was made during one policy period and its report was made in the second. The Fourth Appellate District (Division Three) emphasized that its holding was narrow: it was not invalidating claims-made-and-reported policies but rather was implying an equitable grace period to report a claim under an expired policy.

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Mess in Texas — Insurer Reimbursement of Settlement Payments

While in May 2005 the Texas Supreme Court had unanimously held — but with splintered rationales — that an insurer may recover from its own insured monies advanced by the insurer to settle an uncovered liability claim, the Texas court rang in the 2006 new year by granting rehearing in the case. The case, Excess Underwriter’s at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., (Tex. May 27, 2005), rehearing granted, 2006 Tex. LEXIS 1 (reversed on 1 February 2008), picks up the cudgels on this issue from the California Supreme Court’s opinion in Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313 (Cal. 2001) and seemingly abandons the prior decision in Texas Ass’n of Counties County Gov’t Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128 (Tex. 2000), which had cast substantial doubt on the viability of an insurer-recoupment claim, at the time seeming to bring Texas in line with Massachusetts on this issue. See Med. Malpractice Joint Underwriting Ass’n of Massachusetts v. Goldberg, 680 N.E.2d 1121 (Mass. 1997). Frank’s Casing also parts company with the recent holding of the Illinois Supreme Court in General Agents Insurance Company Of America, Inc. v. Midwest Sporting Goods Company, 828 N.E.2d 1092 (Ill. March 24, 2005), which had rejected a carrier claim to recoupment of defense costs, though on a basis that would bar recoupment of settlement or indemnity payments, too.
In Frank’s Casing, the insured was involved in a serious case, resulting in a $7.5 million settlement. The insurers had previously offered to pay roughly two-thirds of this amount without a right of recoupment against the insured; the insured rejected this proposal, and the insurers paid the full sum and sought recovery from the insured of the entire amount.

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