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June 9, 2006
WASHINGTON, D.C., June 9, 2006 - The English High Court has upheld a challenge to the voting process for solvent Schemes of Arrangement proposed by a group of 16 insurance companies that underwrote insurance and reinsurance business in pooling arrangements known as the WFUM Pools. In the Matter of Sovereign Marine & General Ins. Co.,  EWHC 1335. The challenge was brought by thirteen U.S. policy holders, including Goodrich Corporation, Textron Inc., Sears Holdings Corporation, Exxon Mobil Corporation, and their affiliated companies, which were represented by Covington & Burling.
The Opposing Creditors objected to the proposed Scheme on the ground that Scheme creditors with existing liabilities and outstanding claims have different rights from Scheme creditors with contingent liabilities for asbestos, pollution and other "incurred but not reported" ("IBNR") claims, and that these differences required the convening of separate classes for purposes of voting on the proposed Schemes. IBNR claims are claims where the event giving rise to the policyholder's liability (e.g. exposure to asbestos or pollution many years ago) has already taken place but claims have yet to be asserted against the policyholder.
After holding that he had jurisdiction over the proposed Scheme, Mr. Justice Warren of the High Court agreed that, on the factual evidence presented, the Scheme proponents should have convened two creditor classes, one for creditors with IBNR claims and another for all remaining creditors. He cited another High Court decision, Re British Aviation Insurance Co., issued in July of last year, which rejected another attempt by a solvent insurer to cut off its obligations to policyholders, and held that separate creditor meetings should have been convened by BAIC for creditors with accrued claims and creditors, such as the challenging policyholders, with predominantly IBNR claims involving asbestos, pollution, health hazard and other long-latency exposures.
The WFUM decision is a victory for policyholders who many years ago purchased valuable long term occurrence policies and now are being forced, under solvent schemes like the WFUM Pools and BAIC schemes, to liquidate these irreplaceable rights to coverage in return for a modest cash payment that would permanently divest them of insurance protection for asbestos and other emerging long-tail claims.
William Greaney, the Washington DC based partner of Covington & Burling who headed the policy holders' transatlantic legal team, stated that "It is gratifying that the High Court has once again acted to protect policyholders' contractual rights against attempts by solvent and profitable insurance companies to forcibly extinguish decades' worth of occurrence policies and relieve themselves of their executory promises for which they received substantial premiums. These solvent schemes are particularly unfair to policyholders with immature claims histories, who are just beginning to experience significant latent injury claim exposures and lack reliable data to estimate their future exposures. Since the BAIC decision, insurers doing business in the UK have continued to roll out solvent schemes that do not treat holders of IBNR claims fairly by assigning those claims to a separate voting class of creditors. We are pleased that the High Court has upheld our clients' objections to lumping all creditors into a single amorphous voting class, on the first occasion since BAIC when this action has been challenged in Court."
The successful WFUM Pools and BAIC policy holders were represented by Covington & Burling's Washington, New York and London offices. Covington & Burling's London based solicitors Richard Mattick, of counsel, and associate Harris Bor instructed barristers Richard Sheldon QC and Hilary Stonefrost. Other members of the Covington team included Benedict Lenhart, Patricia Barald and William Boyd in Washington and Susan Johnston and Martin Beeler in New York.
Seven further significant creditors objected to the Scheme, as proposed.