LARGE COMPANIES THAT HAVE CONDUCTED business over many years can accumulate numerous old insurance policies that are long forgotten, or are not known about by the current employees. These policies may still provide valuable cover for claims with long tail exposures, such as asbestosis, which can take 40 years or more from the date of exposure to diagnosis.
From an insurer’s point of view, these long tail liabilities may be an inconvenient drain on resources, as there are continuing costs of administering the claims, and they also tie up capital in related claim reserves. Therefore, insurers are increasingly making use of schemes of arrangement (schemes) to finalise liabilities under a defined class of policies. However, where does a scheme leave the policyholders and how can they ensure that their potential recoveries are not prejudiced?
BACKGROUND TO SCHEMES
Schemes were introduced over 20 years ago and are now governed by Part 26 of the Companies Act 2006. This sets out a court-supervised procedure under which a company may propose a compromise or arrangement, referred to as a scheme, to all its creditors or to any class of them. While schemes were originally used for insolvent insurers as an alternative to liquidation, they have become popular with solvent insurers as an alternative to the traditional run-off of old business.
The purpose of a solvent scheme is to estimate the cost of all present and future claims, including those for which liability has been incurred but not yet reported to the policyholder (known as IBNR). Once an estimate of present and future claims is agreed the insurer is able to pay the agreed sum to each of its policyholders and is discharged from any further liability under the policy. The insurer may then distribute any remaining funds to its shareholders. The policyholder will be able to invest any funds received until they are required to pay the claims that have been compromised by the scheme, although it will have to bear the risk of potential claims increasing in the meantime.
PROCEDURE
If a company wishes to propose a scheme it must first make an application to the court to call a meeting of the creditors (ie, policyholders) or of a class of creditors. The creditors are notified of the proposal and are invited to meet in order to vote on it. The scheme must be approved by a majority in number of creditors whose votes represent at least 75% in value of all votes cast.
If approved at the policyholder meeting, court approval must then be sought. The court must be satisfied that the views of any objecting policyholders have been taken into account, that the scheme protects policyholders’ interests and provides a speedy conclusion, and that every effort has been made to contact the policyholders, since the scheme will bind all policyholders, even those who have voted against it or did not receive notice of it.
When the proposal has been sanctioned by the court, it is filed with the Companies Registrar. Once effective, the scheme is binding upon all affected creditors who are subject to the jurisdiction of the English courts or who have voluntarily submitted to the scheme’s terms. Typically a scheme will have a time frame of 18-24 months from initial negotiations to final payment.
SAFEGUARDS FOR POLICYHOLDERS
Following the watershed case of British Aviation Insurance Company Ltd [2005] (BAIC), policyholders can be more confident that their interests will satisfactorily be taken into account in any proposed schemes. In that case, the court refused to approve the scheme on the grounds that the proposed voting structure did not fairly represent the different classes of policyholders, and criticisms were also made that time limits for policyholders to notify their claims were inadequate. Post-BAIC, the courts may appoint an independent adjudicator to review the insurer’s proposed apportionment of votes, which should provide valuable scrutiny to protect policyholders.
Schemes are also overseen by the Financial Services Authority (FSA) under Principle 11 of its Principles for Businesses. The FSA will review all proposed schemes in order to ensure that confidence in the financial system is maintained and to secure appropriate protection for consumers. If satisfied, the FSA will issue a letter of non-objection as notice that the scheme does not contravene the Principles for Businesses.
MANAGING YOUR CLAIMS
Notwithstanding the safeguards set out above, it is still important for policyholders to be proactive in order to protect their interests and secure a full recovery, including taking the following key steps:
- Following mergers, company restructuring and office moves involving either the insurer or the policyholder, the insurer’s records of policyholders’ details may be seriously out of date. The insurer may therefore be unable to advise some policyholders of a proposed scheme, and/or policyholders may be unaware that they have an interest in the subject business. For this reason, companies should periodically carry out ‘insurance archaeology’ by reviewing their old insurance arrangements and notifying insurers of any new address or other relevant change in circumstances.
- When notice of a proposed scheme is received, policyholders should first identify the affected policies, then discuss the implications with their insurance brokers and, if necessary, seek legal advice. Actuarial advice will be required to calculate the full potential value of current and future claims. This should be done as soon as possible in order to advise the insurer of the claim figures within the set time limit, and to secure the correct voting rights at the policyholders’ meeting.
- Any objections to the scheme can be discussed with the insurers. If they are not resolved, they should be raised at the policyholders’ meeting so that, even if the scheme is approved at this stage, they will be reviewed during the court approval stage.
- Following court approval, policyholders have a set period of time to submit their claims to the insurer, which will then be crystallised and paid under the scheme. Missing this deadline would forfeit any potential claims, so it is vital to monitor the timetable closely.
- Most schemes allow for the insurer to back out if the scheme no longer appears to be in the interests of the company or the creditors. This creates a risk that policyholders will spend time and money putting forward a claim with no result. However, policyholders should not be discouraged from submitting a fully considered claim under the scheme, as the alternative may be that potential claims are reduced or not recovered at all.
In many cases, a scheme will provide benefits for policyholders as well as insurers, including certainty of recovery and an investment opportunity for the proceeds. Therefore, provided that these guidelines are followed, policyholders’ concerns about schemes of arrangement should be allayed.
By Daniel Saville, senior assistant solicitor, and Sarah Wallis, trainee solicitor, Reynolds Porter Chamberlain LLP.