The pandemic has plunged many previously healthy businesses into or close to insolvency, with serious implications for both the company itself and its commercial counterparties. In the middle of a crisis, it is easy to overlook insurance. Yet, by taking the right steps, corporates can use insurance to bring much-needed stability and liquidity.
In this briefing we outline just some of the insurance issues which should be considered by in-house lawyers when their company – or a counterparty – is in financial distress.
Considerations when in financial distress
If your company is experiencing financial distress, remember that insurance policies are important assets within the estate. It is critical that the ability to claim under those policies is protected and that existing claims are not jeopardised. Understanding how policies will respond in an insolvency scenario and planning ahead for renewal and the conduct of existing claims will improve the prospects of realising the value of these assets.
Some policies may contain a clause that sets out the implications for the insurance where an insured is insolvent. They may for example provide that insurers come off risk in respect of acts/occurrences after the date of insolvency. If your company is in financial distress, it is advisable to review your policies carefully to understand what will happen in the event of insolvency. Insolvency regimes differ from jurisdiction to jurisdiction, and there may be uncertainty as to whether the relevant provision is triggered. It is best to identify such issues in advance of any insolvency process commencing.
Although companies often wish to keep their financial problems confidential, it may be advisable or even necessary to inform insurers. For example, there may be matters relating to the company’s financial difficulties which are notifiable circumstances, claims or events potentially giving rise to an insurance claim. Further, if insurances are being renewed or varied while the company is in financial difficulties, this may itself be a matter which should be disclosed to insurers as part of the insured’s duty of fair presentation of the risk. Some policies include obligations to advise insurers of changes in the risk insured during the policy term irrespective of whether a claim is possible or contemplated and this could include group restructuring or insolvency of key counterparties.
The decisions that individual directors and officers have taken before or take when their company is in financial distress may be the subject of particularly close scrutiny. It is therefore vital to understand the scope of any directors’ and officers’ liability insurance that is in place and take any steps required under the policies to ensure that cover is maintained.
Considerations in insolvency proceedings/restructuring
Certain policies may provide that there will be no cover for claims or events which take place after the date of insolvency. Issues may also arise if, due to restructuring (whether to avoid or in an insolvency), certain group companies are no longer insured. In these circumstances, it is important to consider with your broker whether ‘run-off’ cover is available or required to cover claims that come to light after the insolvency or restructuring in connection with acts that pre-date it.
The office-holder will of course need to ensure that appropriate insurance is maintained during the period of the insolvency, particularly if the company is still operating as a business. To do that, they will need to pay any necessary premiums to renew existing cover, and comply upon renewal with an insured’s duty of fair presentation. Tracking the policies which are due to expire and anticipating the need to fund renewal premiums will be critical, as will getting across the information that needs to be presented to insurers upon renewal.
Where the insolvent insured has the benefit of actual or potential claims, decisions will have to be made as to whether – and if so, how – those claims will be pursued and by whom. If the losses in question are particularly complex or long-tail, it may be many months or even years before cover is confirmed and the indemnity is paid. The company may have insufficient funds to pursue such a claim. In this situation, the office-holder may consider assigning the benefit of the claim or its proceeds to a third party, potentially to realise some cash from a purchaser of the claim sooner. Policy conditions should however be checked, as assignment may require insurer consent. Funding for the office-holder to pursue the claim may also be available from specialist funders or creditors.
Finally a word about the authority of the company’s agents: their authority may be compromised upon the insolvency. This ought to be checked since the ability of the company’s brokers to handle claims and renewals may be impacted, and new retainers may need to be entered into with the express authority of administrators/liquidators.
Counterparty insolvency and crime
Even if your company is solvent, the insolvency of an important counterparty such as a customer, contractor or supplier can lead to serious problems.
It may be possible to insure against the risk of counterparty insolvency. Credit risk insurance provides cover against non-payment by customers or borrowers. To trigger cover, it is usually necessary for the non-payment to be due to a specified cause, such as commencement of insolvency proceedings. There is often a specified period which must have elapsed (known as the waiting period, often 180 days) before the insurance will pay out. The terms of credit risk insurance policies are often insurer friendly, so strict compliance with their terms (eg on notification, claims co-operation) is crucial to preserve the claim and maximise recoveries. Delays and procedural mis-steps, even if inadvertent or innocent, can be fatal to the claim.
Sometimes financial problems are the result of – or can lead to the discovery of – crime. Many businesses purchase crime insurance to protect against the dishonesty of employees and third-party fraud. The extent of cover will, however, depend upon the wording. It is vital that you familiarise yourself with the terms of the policy, so that timely notification can be made and you understand the extent of cover.
Finally, if you have a potential claim against a company (eg a negligent contractor) which has become insolvent, all is not lost. Under the Third Party (Rights Against Insurers) Act 2010, the insolvent company’s claim under its liability insurance is transferred to the claimant. The claimant can then bring proceedings against both the insolvent company and its liability insurers at the same time. If you find it difficult to get access to the insolvent counterparty’s insurance, there is a statutory mechanism to obtain this information under the 2010 Act.
In situations of financial distress, insurance can form part of the solution. It is however vital to speak with your broker early on to understand the scope of cover available and take advice on the steps needed to protect insurance recoveries.