UK Court Opinions

ENGLISH HIGH COURT RULES THAT EQUITAS MAY USE ACTUARIAL MODELING TO RECOVER LONDON MARKET EXCESS OF LOSS SPIRAL LOSSES

December 23, 2009 by Carlton Fields

This dispute concerns indemnity for losses stemming from the Exxon Valdez oil spill in 1989 and the loss of aircraft at the Kuwait International Airport when Iraq invaded Kuwait in 1990. Equitas Ltd. (“Equitas”), as the assignee of the rights of Lloyd’s syndicates, brought claims against R&Q Reinsurance Company Ltd. (“R&Q”) under reinsurance contracts written by R&Q within the London Market Excess of Loss spiral. Equitas argued that recoverable losses were capable of being proved, Equitas had succeeded in proving these losses to a standard of the balance of probabilities through the use of actuarial modeling, and, therefore, Equitas was entitled to recovery. R&Q argued against any recovery unless Equitas could prove contract by contract, at each level of the spiral, that the sums claimed were properly due. The High Court sided with Equitas, ruling that how Equitas proved losses was one of fact or evidence. Equitas was not required to prove losses contract by contract at each level of the spiral. The High Court next ruled that actuarial modeling, although imperfect, was an acceptable solution to prove properly recoverable losses incurred by the syndicates. Equitas Ltd. v. R&Q Reins. Co. Ltd., [2009] EWHC 2787 (Comm. Ct. Nov. 11, 2009).

This post written by Dan Crisp.

SCOTTISH COURT DISAPPROVES A SOLVENT SCHEME OF ARRANGEMENT

October 21, 2009 by Carlton Fields

The Scottish Court of Session Decisions has nixed a scheme of arrangement under the UK Companies Act of 2006, stating it could not be judicially sanctioned without the assent of all creditors. A scheme of arrangement is a reorganization device in which, with the approval of at least three-quarters of a company’s creditors, the company may compromise the claims of all its creditors. A somewhat analogous device might be a “cram-down” under U.S. bankruptcy law, with the important distinction that a scheme of arrangement may be used even by a solvent company. This procedure has been criticized by US insurance companies. There are three stages to a scheme of arrangement. First, there must be an application to the court for an order that a meeting of creditors be summoned. Second, the scheme proposals are put to the meeting and are approved (or not) by the requisite majority. Third, if approved at the meeting, there must be a further application to the court to obtain the court’s sanction to the arrangement.

In the case before the Court of Session Decisions, Scottish Lion Insurance Company had been in runoff since late 1994, and in 2008 had proposed a scheme of arrangement to terminate its exposures under short- and long-tail policies. The scheme was opposed by various U.S.-based creditors which were insureds under general liability or general aviation insurance policies with Scottish Lion. The court, noting it was not bound to sanction a scheme which had achieved the statutory majority at the creditors’ meeting, declined to exercise its discretion to approve the scheme. Scottish Lion was solvent and appeared to have made provision to meet its potential liabilities in the future. Thus, the court asked rhetorically, “in a situation where the Company is sound financially, why should one group of creditors who might wish to enter into a commutation agreement with the Company be entitled to force other creditors to participate against their will?” In such a case, sanctioning a solvent scheme smacked of “unreasonableness” to the minority. In the Petition of Scottish Lion Insurance Company, Ltd. [2009] CSOH 127.

This post written by Brian Perryman.

EQUITAS BUSINESS TRANSFER SCHEME SANCTIONED

September 10, 2009 by Carlton Fields

A UK court has entered judgment in an application brought by Equitas Ltd. and Equitas Insurance Ltd. for an order under section 111 of the Financial Services and Markets Act 2000 sanctioning a scheme for the transfer to Equitas Insurance Ltd. of the 1992 and Prior Business carried on at Lloyd’s. Section 111 is concerned with business transfer schemes. Per the court, the scheme is intended to bring finality to a process which began with a reconstruction and renewal plan promoted and implemented by Lloyd’s in the second half of 1996. In the Matter of the Names at Lloyd’s for the 1992 and Prior Years of Account, Represented by Equitas Ltd., [2009] EWHC 1595 (Ch. Ct. July 7, 2009).

This post written by John Black.

CASE UPDATE: JUDGMENTS REVERSED BY HOUSE OF LORDS IN APPEALS ASKING WHETHER COVERAGE UNDER A PROPORTIONAL FACULTATIVE REINSURANCE CONTRACT IS COEXTENSIVE WITH COVERAGE UNDER THE INSURANCE CONTRACT

September 8, 2009 by Carlton Fields

In an April 8, 2008 post, we reported on a UK Court of Appeals decision, Wasa International Insurance Co. v. Lexington Ins. Co., [2008] EWCA Civ. 150 (Feb. 29, 2008), reversing a lower court’s decision denying reinsurance coverage despite a follow the fortunes provision, based on a finding that the damages occurred outside the coverage period of the reinsurance, and despite the conclusion of a US court on the underlying claim finding liability for damage occurring outside the coverage period of the underlying policy. The Court of Appeals found that the coverage provision of the reinsurance should be interpreted in the same manner as the coverage provision in the underlying insurance. The Court of Appeals agreed that the insurance and reinsurance contracts were not entirely “back-to-back” in terms of the coverage periods, but concluded that although there were some differences in the contracts, the parties intended that they should have the same effect, so the reinsured’s settlement of the insurance claim did fall within the terms of the reinsurance contract.

The UK House of Lords allowed consolidated appeals from the Court of Appeals. These appeals raised the question of the extent to which the coverage under a proportional facultative reinsurance contract is, or should be construed as being, coextensive with the coverage under the insurance contract. The House of Lords, as articulated by Lord Collins, found that the reinsurer takes a proportional share of the premium and bears the risk of the same share of any losses. Normally reinsurance of that kind is back-to-back with the insurance, and the reinsurer and the original insurer enter into a bargain that if the insurer is liable under the insurance contract, the reinsurer will be liable to pay the proportion which it has agreed to reinsure. Any loss within the coverage of the insurance will be within the coverage of the reinsurance. In the view of Lord Phillips, the result of the appeals was dictated by the fact that the subject reinsurance contract was governed by English law and by the principle under English law that a reinsurance contract in relation to property is a contract under which the reinsurers insure the property that is the subject of the primary insurance; “it is not simply a contract under which the reinsurers agree to indemnify the insurers in relation to any liability that they may incur under the primary insurance.” Lexington Insurance Co. v. AGF Insurance Ltd., [2009] UKHL 40 (July 30, 2009).

This post written by John Black.

UK COURT DENIES REINSTATEMENT COVERAGE FOR SAME CLAIM

July 30, 2009 by Carlton Fields

The UK Commercial Court recently considered the ambit and extent of insurance coverage between Flexsys America LP and XL International Corp. In particular, the court was left to interpret whether a reinstatement provision (which are sometimes found in reinsurance agreements) in the master insurance policy should be made to provide additional coverage for a claim governed by a local policy extended to Flexsys by a company related to XL. In 2006, a Korean company (KKPC) filed a complaint alleging improper and illegal conduct by Flexsys. Flexsys claimed indemnity under a provision in the local policy. Flexsys settled the claim and incurred legal costs of over $2 million. The local policy carriers (who expressly denied liability) settled with Flexsys for the policy limit of $1 million. Flexsys sought recovery of the balance from the master policy insurers (the Defendants) alleging that the “Drop Down Clause” included in the master policy provided “umbrella” coverage that would provide a higher limit of indemnity.

The judge, Lord Tomlinson, rejected Flexsys’ argument, and interpreted the language of the Drop Down Clause to provide for a reinstatement of the local policy for “subsequent claims” and not, as Flexsys asserted, for the same claim. Further, the judge rejected Flexsys’ position that such a low level of coverage ($1M) was commercially unreasonable. The court could not address this question without dramatically altering the scope of the lawsuit to determine the range of commercial considerations necessary for such a decision. Finally, Lord Tomlinson concluded that Flexsys would not be reimbursed for additional legal expenses under the local policy because the claim at issue by the Korean company (product disparagement) was subject to an exclusion under the local policy. Flexsys Am. L.P. v. XL Ins. Co. Ltd., [2009] EWHC 1115 (Comm. Ct. May 20, 2009).

This post written by John Black.