British Aviation Insurance Company (BAIC) has become the first insurer to see a successful court challenge to its proposed solvent scheme of arrangement.
Mr Justice Lewison held that he lacked jurisdiction to sanction the solvent scheme of arrangement proposed by BAIC, and that the scheme was unfair to policyholders in a number of respects.
The decision is a victory for a group of significant US aviation industry policy holders of BAIC that did not want to relinquish the long term cover for future claims that they had bought from BAIC many years before, and which the scheme would have liquidated in return for a cash sum based on an estimate of the value of those future claims.
The judge found that he had no jurisdiction to sanction the scheme because BAIC should have held separate creditor meetings for creditors with accrued claims and creditors, such as the challenging policyholders, with so-called IBNR (incurred but not reported) claims.
The judge held that the scheme was unfair because it included an unrepresentative voting process that did not fairly value policyholders' votes and did not correctly allow for special interests of some of the voting parties.
He also held that unfairness arose due to an overly short bar date for presentation of claims, an inadequate estimation methodology and a provision allowing BAIC to unilaterally terminate the scheme and revert to the status quo ante at will.
The judge found that most of the alleged advantages of the scheme put forward by BAIC in fact benefited BAIC rather than the policyholders.
He said: "The most powerful consideration is that it seems to me to be unfair to require manufacturers who have bought insurance policies designed to cast the risk of exposure to asbestos claims on insurers to have that risk compulsorily retransferred to them. [BAIC] is in the risk business; and [the policyholders] are not.”
William Greaney, partner of Covington & Burling, who headed the policyholders' transatlantic legal team, said: "This is a triumph for basic fairness and a vindication of the purpose of liability insurance.
"Solvent schemes of arrangement that can deprive policyholders of irreplaceably valuable ‘occurrence' cover for future asbestos and pollution claims have been rolled out in increasingly frequent numbers during recent years, with no detailed consideration by the courts of their effect and fairness.
"We are pleased that the High Court has upheld our clients' objections so categorically on the first occasion on which it has been called upon to consider a challenge by policyholders to a solvent scheme”
The judgment is a setback for London market insurance companies, facing asbestos, pollution and other long-tail claim liabilities to US policyholders under decades of occurrence policies, who have increasingly turned to solvent schemes of arrangement in an effort to cut off their future liabilities to policyholders.
New solvent schemes are now likely to be on hold until the outcome of any appeal that may be made by BAIC is known.
