In the recent case of Sovereign Marine and General Insurance Co Ltd, Re [2006] EWHC 1335 (Ch D (Companies Ct)) the Court has reaffirmed the right of policyholders with contingent liabilities to be consulted separately when required to approve a solvent scheme of arrangement. This is in line with the decision last year in the British Aviation Insurance Company (BAIC) case. Although various schemes have been approved since the BAIC decision, that case had raised concerns that insurers may find it increasingly difficult to use solvent schemes of arrangements to extinguish their long-tail liabilities. The case revolved around a proposed solvent scheme concerning a pooling arrangement underwritten through Wills Faber (Underwriting Management) Limited. The policies covered by the scheme provided broad coverage on a "per occurrence" basis, including cover for long tail liabilities such as asbestos, pollution and health hazard liabilities. A number of policyholders (including the National Grid and major US companies such as Goodrich, Textron, Exxon Mobil etc) objected to the proposal that there would be a single meeting comprising all classes of creditors to vote on the scheme. They said this was contrary to the findings of the BAIC case, relying heavily on the similarities between the two cases, including the fact that some of the policies were nearly identical.

Whilst finding in their favour, Warren J rejected the policyholders' contention that BAIC had set a precedent under which policyholders with contingent claims would automatically be considered as a class of creditors to be consulted separately. Having reviewed the relevant case law at length, he concluded that whether creditors belonged to the same class was a question of fact, to be answered by applying the following test: "Are the rights of those who are to be affected by the scheme proposed such that the scheme can be seen as a single arrangement; or ought the scheme to be regarded, on a true analysis, as a number of linked arrangements?"

This required an analysis of the rights of the policyholder in their current situation and under the proposed scheme to decide whether the rights of the policyholders were so different as to make consultation in their common interest impossible. After considering detailed expert evidence, Warren J concluded that the rights enjoyed by policyholders with Incurred but Not Reported (IBNR) claims were of a different nature because there was uncertainty as to the occurrence as well as uncertainty about the valuation of these claims. Thus policyholders should be separated into the two following classes: (i) those with existing liabilities and outstanding claims and (ii) those with IBNR.Warren J was asked to consider whether reinsurers should also be considered as a separate class of creditors. He decided that this was not the case, but admitted it was a difficult decision to make, suggesting that a different view could be taken in other circumstances. Finally, in this case the Court was concerned with a solvent scheme. From comments made by Warren J, however, it would seem that a Court may be more inclined to conclude that all creditors should be treated as one class in the case of an insolvent insurer, since in such cases the winding up enables a common interest to be identified.
Source: Addleshaw Goddard