Ruling threatens run-off schemes

A landmark High Court ruling last week could end the use of solvent schemes of arrangement to run off insurance companies' liabilities, experts have warned.

The judge in the case refused to sanction a scheme proposed by the British Aviation Insurance Company (BAIC) to run off long-tail products liability business written in the US and Canada between 1930 and 1991.

Schemes of arrangement allow insurers to run off business without placing it in liquidation - effectively a 'deal' between a company and its creditors.

The decision could have major ramifications for insurers in run-off. Without schemes of arrangement insurers can be exposed to damaging court actions by creditors and possible class actions, particularly in the US.

The ruling was the first successful challenge to an insurance company seeking to curtail its future liabilities by using such schemes.

Neil Golding, head of insurance solutions at law firm Freshfields Bruckhaus Deringer, said: "The effect of the judgment is that the court will not allow this type of scheme in future. So, unless the Court of Appeal says otherwise, this could be the end of the road for solvent schemes."

The judge sided with creditors who opposed the scheme in their assertion that there should have been separate creditor meetings for those with accrued claims and those with incurred-but-not-reported claims.

Ipe Jacob, head of Grant Thornton's financial markets group, said: "With most schemes representing hundreds if not thousands of creditors, this ruling is likely to see the market for solvent insurers schemes shrink dramatically."

But PricewaterhouseCoopers, which has overseen 34 of the 45 schemes set up for insurers so far, denied the ruling spelled the end for the practice.

Partner Dan Schwarzmann said: "This has certainly come as a surprise, but the redeeming feature of schemes is the way they have evolved. To suggest this is the end for schemes is ridiculous."

BAIC has been granted two weeks to appeal against the decision.