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Covington Clients Successfully Challenge British Aviation Insurance Company Ltd.'s Solvent Scheme of Arrangement

July 21, 2005

Washington, D.C., July 21, 2005 - London Market insurance companies facing asbestos, pollution, and other long-tail claim liabilities to U.S. policyholders under decades of occurrence policies have increasingly turned to solvent schemes of arrangement under Section 425 of the English Companies Act 1985 in an effort to cut off their future liabilities to policyholders.   Those efforts received a significant setback today when the English High Court of Justice, Chancery Division, Companies Court (Mr. Justice Lewison) dismissed a petition to approve such a scheme by British Aviation Insurance Company Ltd. ("BAIC"). 

This is the first proceeding in which a scheme of this kind involving a solvent insurer has been opposed.  The Opposing Creditors, a coalition of BAIC's U.S. policyholders including Goodrich Corporation, The Goodyear Tire & Rubber Co., Textron, Inc., and various of their subsidiaries, are represented by William F. Greaney of the Washington, D.C. office of Covington & Burling.  Mr. Richard Sheldon QC and Ms. Hilary Stonefrost appeared for the Opposing Creditors at the sanction hearing, instructed by Mr. Richard Mattick of Covington's London office.

Opposing Creditors maintained that the court lacked jurisdiction to approve a scheme which improperly placed creditors with substantially different rights (including policyholders with primarily or exclusively accrued claims and policyholders with primarily incurred but not reported or "IBNR" claims) into a single voting class.  They also urged the court not to approve a scheme where (a) those voting favourably had special interests and were not representative of the general class of creditors in whose name they were permitted to vote, (b) the scheme lacked a methodology for estimating future claims that provided a clear basis to treat all creditors equally, (c) BAIC could arbitrarily return to run-off at any time, and (d) the alleged benefits of the scheme inured principally to BAIC's shareholders rather than to its policyholders.  The court held that it did not have jurisdiction to sanction the scheme, and would not do so even if it had on account of the scheme's inherent unfairness.  The court concluded that "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."        

The court's decision could have substantial consequences given the marked increase during the past two years in the promotion and use of solvent schemes of arrangement by insurance companies as a quick way to extinguish long tail asbestos and environmental claims.  Pending schemes structured similarly to the BAIC scheme may need to be reconfigured or withdrawn.  It can also be expected that U.S. policyholders, now increasingly aware of the potentially catastrophic consequences of losing their IBNR coverage under such schemes at a time when asbestos and similar claims are escalating against many companies, may be more active in opposing similar schemes in the English court and in proceedings under Section 304 of the U.S. Bankruptcy Code to enforce such schemes in the U.S. 

Mr. Greaney, who represents U.S. policyholders and coalitions of policyholders in proceedings in the U.S. and abroad, commented that "U.S. insureds need to be alert to solvent schemes and their potential to extinguish valuable coverage rights if policyholders don't act to protect them.  Notice of a solvent scheme is often inadequate and uninformative, as in this case, and failure to object can enable scheme proponents to force unwanted and detrimental policy commutations on the majority of policyholders based on a vote by a small minority with special interests.  The court's decision shows that these concerns will be listened to if raised, and that policyholders need not sit back and let irreplaceable coverage rights be taken from them to enrich their insurer's shareholders." 

Other members of the Covington team included partners Benedict Lenhart and Patricia Barald and associate William Boyd in Washington, Susan Johnston, Of Counsel, in New York, and Richard Mattick, Of Counsel, and associate Harris Bor in London.

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