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Scottish Lion Ruling Final


WASHINGTON, DC, October 23, 2009 — A Scottish court has entered its final ruling in a challenge by policyholders that addressed significant issues related to solvent schemes of arrangement put forward by London Market insurance companies. On October 14th, the Scottish Court of Session in Edinburgh ruled in favor of Scheme Creditors opposing a solvent scheme of arrangement by the Scottish Lion Insurance Company Limited, and dismissed the company’s petition for approval of the proposed Scheme. The Opposing Creditors consisted of US policyholders Goodrich Corporation, ExxonMobil Corporation, Textron, Inc., ITT Corporation, and Zapata Corporation, and were represented by Covington & Burling LLP. They opposed the Scottish Lion Scheme on grounds that it would allow Scottish Lion, which is not insolvent, to cut off valuable and irreplaceable coverage rights of policyholders against their will and without providing reasonable and adequate compensation for being stripped of those rights.

In his opinion, Lord Glennie rejected Scottish Lion’s contention that the Opposing Creditors had no right to challenge Scottish Lion’s unilateral alteration of vote valuations submitted by Scheme Creditors, and accepted the Opposing Creditors’ arguments that the Scottish Lion scheme was fundamentally unfair to policyholders. He wrote that he “respectfully agreed with” the reasoning of a prior court ruling refusing to sanction the solvent scheme in the matter of British Aviation Insurance Co., and quoted with approval the following key passage from the decision of Mr. Justice Lewison in that matter:

If individual policyholders wish to [settle with BAIC] and to accept payment in full for an estimate of their claims, there is nothing to stop them doing so. But to compel dissentients to do would . . . require them to do that which it is unreasonable to require them to do.

Covington & Burling LLP has successfully represented US policyholders opposing solvent schemes in proceedings involving Scottish Lion, BAIC, and the Willis Faber Underwriting Management scheme (“WFUM”), which have to date been the only insurance solvent schemes subject to judicial challenge by direct policyholders. The decisions in these cases individually and collectively demonstrate judicial recognition of the serious problems presented by such schemes, which are designed to enrich insurance company shareholders at the expense of the company’s policyholders, by divesting them of long-held contractual rights to coverage under occurrence policies often valued in the hundreds of millions of dollars. BAIC, WFUM and Scottish Lion also demonstrate the willingness of certain policyholders to vigorously defend these valuable rights by mounting legal challenges in the appropriate courts.

Mr. James McNeill QC, and Ms. Jane Munro appeared for the Opposing Creditors in the Scottish proceedings, instructed by Mr. Gavin Henderson of Simpson & Marwick in Edinburgh. The transatlantic Covington team was led by William Greaney, a Washington based partner, and included DC partners Benedict Lenhart and Patricia Barald, and associates Shara Boonshaft and Joshua McKarcher, London partner Anne Ware, and New York of counsel Susan Johnston.

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