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Reorganization and Liquidation

Delaware Bankruptcy Court Confirms Restructuring Plan Involving Scottish Re

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A Chapter 11 restructuring plan involving various affiliates of Scottish Re, each of which separately declared bankruptcy in different jurisdictions, was recently approved by a bankruptcy court in Delaware. The finalization of the plan depended on coordination among: (1) Scottish Holdings Inc. (“SHI”), (2) Scottish Re: Group, LTD., SHI’s parent company, (3) Scottish Annuity & Life Insurance Co. Ltd. (“SALIC”), an indirect debtor subsidiary, and (4) Scottish Financial Luxembourg (“SFL”), a financing entity. Prior to the approval of the plan, the receiver for SFL, which asserted an unsecured, nonpriority claim against SALIC in the amount of $63,536,041.32 for a debenture assigned from Scottish Re, stipulated with SHI that any potential claims against certain current or former members of the board of managers for SFL would be preserved. The stipulation and the restructuring plan was then approved. In re Scottish Holdings Inc. et al., Case No. 18- 10160 (U.S. Bankr. Ct. Del. Aug. 22, 2018).

This post written by Gail Jankowski.

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VIRGINIA SUPREME COURT CONSIDERS TERMS OF ASSUMPTION REINSURANCE TRANSACTION IN DETERMINING OBLIGATIONS OF INSOLVENT INSURER

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A group of Kentucky hospitals sought reimbursement for legal fees incurred in two lawsuits related to the insolvency of their insurer, Reciprocal of America (“ROA”). In the 1970s and 1980s, the hospitals created two trusts to provide the hospitals with workers’ compensation and employers’ liability coverage. In 1997, the trusts were merged into ROA, and ROA agreed to assume the trusts’ business liabilities and to indemnify the trusts and their member insureds, including the hospitals, “in defending [themselves] against any claim Damages arising from or connection with the Damages.”

In 2003, ROA was placed into receivership and was later found insolvent and ordered liquidated. This led to two judicial proceedings in which the hospitals were involved—one that they joined as claimants seeking to have ROA continue to pay worker’s compensation claims that ROA had assumed from the trusts, and one seeking a declaration that the Kentucky Insurance Guaranty Association (KIGA) was obligated to cover the hospitals’ claims that ROA had assumed but could not pay. After both matters were resolved, the hospitals filed claims with ROA’s Special Deputy Receiver for reimbursement of the legal fees and costs incurred in those matters under ROA’s indemnification obligations. The claim was denied, and the case ended up before the Virginia Supreme Court.

The court affirmed the denial of the hospitals’ claim. The court explained that the plain meaning of the phrase “defending against any claim” and the specific contractual definition of “Damages,” together support the characterization of the agreements as an assumption reinsurance transaction in which ROA stepped into the shoes of the trusts. ROA’s indemnity could rise no higher than the pre-merger obligations of the two trusts — for those were the only liabilities that ROA assumed, and thus the only “Damages” for which it was responsible to indemnify the trusts. This contractual definition of “Damages” necessarily excludes any obligation for ROA to indemnify the trusts and their member insureds for the legal fees and costs incurred in the underlying judicial proceedings. The court rejected the hospitals’ argument that ROA’s duty to pay for the expense of defending against claims covered the expense of asserting claims. While it may have been good legal strategy for the hospitals to proactively assert such claims, this did not turn the assertion of claims into the defense of claims covered by ROA’s indemnification agreement. Appalachian Regional Healthcare v. Cunningham, Case No. 161767 (Va. Nov. 22. 2017).

This post written by Jason Brost.

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DISTRICT COURT DISCHARGES PHOENIX FIRE AND MARINE INSURANCE COMPANY CONSERVATOR

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After 14 years, the Commissioner of Insurance of the Virgin Islands has been discharged as conservator of Phoenix Fire and Marine Insurance Company (“Phoenix”).  The Commissioner reported that: $15,936,228.13 had been paid to claims under Phoenix policies; $298,452.38 in unearned premiums disbursed to policy holders; $1,819,449.76 held in trust; and there is a balance of $3,819,449.76 in outstanding claims and unearned premiums.

In addition to discharging the Commissioner, the Court awarded $400,000 in administrative fees and deposited $1,396,169.10 in unclaimed funds with the Commission of Finance to be designated as the Phoenix Fire Trust Fund, into which any unclaimed funds shall be deposited.  Potter v Phoenix Fire and Marine Ins. Co. Ltd., et al., Civil No. 1991-271 (USDC D.V.I. Nov. 3, 2017).

This post written by Nora A. Valenza-Frost.
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U.K. COURT APPROVES MULTI-BILLION POUND PLAN TO TRANSFER ANNUITY LIABILITIES UNDER REINSURANCE AND BUSINESS TRANSFER AGREEMENTS

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The Queen’s Bench Division of the U.K.’s High Court of Justice recently approved a scheme proposed by Scottish Equitable Plc to transfer its liabilities as to over 185,000 insurance policies to Rothesay Life Plc. The scheme was backed by roughly £7 billion in assets paid to Rothesay under a series of annuity reinsurance and business transfer agreements executed in April 2016.

The court’s approval was guided by eight principles used by British courts in assessing long-term business transfer plans. While the primary factor is whether the scheme would adversely impact policyholders, the court held that a scheme will not be rejected simply because it may adversely affect certain policyholders. Instead, viewed as a whole, the scheme must be objectively “fair.” The court also noted that a proposal will not be rejected solely because it is not the “best possible scheme,” stating that deference should be given to the company’s choice of schemes, provided that choice is objectively fair. The court rejected policyholders’ objections, finding the proposed scheme was sufficient to protect policyholders’ interests. The court also rejected the argument that the scheme was not the “transfer of a business” under the FSMA simply because the policies were being reinsured, finding that the transaction did not need to expose Scottish Equitable to “risk or reward” to qualify as the transfer of its “business.” See In the Matter of Scottish Equitable Plc and In the matter of Rothesay Life Plc, [2017] EWHC 1439 (Ch).

This post written by Alex Silverman.

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RELIANCE LIQUIDATION COURT APPROVES APPLICATION FOR DIRECT PAYMENTS FROM RELIANCE’S REINSURERS TO CERTAIN INSUREDS

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The court handling the liquidation of Reliance Insurance Company has approved an application for the direct payment of reinsurance proceeds by Hunt Equities, Inc., as guarantor of Mount Vernon Insurance company (the “Reinsurer”), to Reliance’s insured, Hunt Consolidated, Inc., with respect to certain workers compensation and employers liability policies issued to Hunt Consolidated, Inc., for the policy periods of 1991 to 1996. The court found that the Reinsurer had unequivocally assumed Reliance’s direct coverage obligations to Hunt Consolidated, Inc., that Hunt Consolidated, Inc. had consented to the substitution of the Reinsurer for Reliance and to the release of Reliance for all coverage related claims, and that permitting such direct payment complied with the Section 534 of Article V of the Pennsylvania Insurance Department Act of 1921, the court’s own guidelines for enforcement of the Act, and it prior orders.

In re Reliance Insurance Company, No. 1 REL 2001 (Pa. Comm. Ct. Aug. 9. 2017)

This post written by Jason Brost.

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