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Attempt to End Run-Off Rejected as Unfair to Minority Creditors
Insurance Law Update
Scottish Court of Session
The Scottish Court of Session recently refused to sanction a scheme presented by Scottish Lion Insurance Company Limited, a solvent and financially secure company that has been in run-off since 1994. [2009] CSOH 127. The scheme was intended to bring run-off to an end, thereby crystallizing the company’s losses and claims-related expenses sooner rather than later for the benefit of the company’s shareholders. The practical effect for Scottish Lion’s insured creditors was that they would have been paid on the basis of an estimate of the value of their claims, or potential claims, so that some creditors would receive more, and some creditors would receive less, than that to which they would otherwise be entitled.
The proposed scheme was approved by a statutory majority of the creditor classes. However, a minority group of creditors opposed the scheme, arguing that it would deprive them of occurrence-based insurance coverage that had been purchased for a substantial premium and that could not be adequately replaced in the current market.
The court refused to sanction the scheme notwithstanding its approval by the majority of the company’s creditors. It reasoned that although there was nothing to prevent an individual insured creditor from commuting a policy with the Scottish Lion, it was both unfair and unreasonable to force other insureds to enter into similar arrangements in circumstances where, but for the scheme, they would have a continuing right to indemnification by the company in the event of subsequent claims. The decision will likely be appealed.
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