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Reinsurance Regulation

SCOTTISH COURT DISAPPROVES A SOLVENT SCHEME OF ARRANGEMENT

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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.

DISTRICT COURT FINDS NO SUBJECT MATTER JURISDICTION IN AIG SUIT

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The District Court for the District of New Jersey recently granted defendant AIG’s motion to dismiss Robert Plan Corporation’s claims arising out of a series of reinsurance agreements between the parties. The procedural history of the action is complex, and it involves underlying state court action, financial rehabilitation and bankruptcy proceedings. Robert Plan filed a Notice of Removal in January, 2009, and AIG subsequently moved to dismiss for lack of subject matter jurisdiction. The court granted the motion to dismiss, finding that that there was no case or controversy for the court to decide because the underlying state court action had been dismissed by the time plaintiffs filed their notice of removal. Additionally, because the Court found subject matter jurisdiction lacking, it denied as moot Robert Plan’s Motion to Transfer Venue. The Robert Plan Corp. v. American Int’l Group, Case No. 09-200 (D.N.J. Aug. 10, 2009).

This post written by John Black.

NAIC PROPOSES THE REINSURANCE REGULATORY MODERNIZATION ACT OF 2009

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On September 15, 2009, the National Association of Insurance Commissioners approved for submission to Congress the Reinsurance Regulatory Modernization Act of 2009, which would alter state regulation of reinsurance, and provide for federal preemption. If enacted, the legislation would create two new classes of reinsurers: national reinsurers (United States) and port of entry reinsurers (non-United States). To transact reinsurance business in the United States, national reinsurers would be licensed through a single home state. Port of entry reinsurers would be certified through a single port of entry state. At their election, reinsurers also could continue operating under the existing regulatory regime. The legislation also provides for the establishment of the Reinsurance Supervision Review Board as a federal entity responsible for evaluating states and non-United States jurisdictions. State insurance regulators would be responsible for evaluating national and port of entry reinsurers and establishing collateral requirements for reinsurance agreements. Conflicting state laws oncredit requirements would be preempted as to national and port of entry reinsurers.

This post written by Brian Perryman.

COURT DISMISSES INTERVENOR/REINSURER'S CLAIM AGAINST GENERAL ELECTRIC ON ALLEGED WRONGFUL REDOMESTICATION

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General Electric (“GE”) brought an action for breach of contract against the joint liquidators of the entity formerly known as Electric Mutual Liability Insurance Company (“EMLIC”). Years ago, a solvent EMLIC had refused to defend and indemnify GE in regards to liability for environmental contamination. OneBeacon America Insurance Company (“OneBeacon”), whose predecessor reinsured EMLIC in connection with GE’s claims, intervened as the defendant and asserted three counterclaims. GE then filed a motion for summary judgment on the third counterclaim, which alleged a breach of fiduciary duty by GE regarding EMLIC’s wrongful redomestication to Bermuda to declare itself insolvent and to pursue liquidation. The court granted GE’s motion, ruling that GE, as sole policyholder, shareholder, and creditor to EMLIC, owed no fiduciary duty to EMLIC. The court then stated that, even if GE owed a fiduciary duty, no breach occurred because EMLIC was not harmed by the redomestication. Finally, the court denied OneBeacon, standing in EMLIC’s shoes, equitable relief from its contractual obligations because EMLIC was complicit in the wrongful redomestication. General Elec. Co. v. Lines, Case No. 2006-3106 (Mass. July 2009).

This post written by Dan Crisp.