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Rewards to Be Made

Insurance Claims in the London Market

Volume 10, No. 2, First Quarter 2004

By David Stern

Billions of dollars of claims are settled with the London market every year. Many of these claims will have had a portion of the risk underwritten by insurance companies that are now insolvent. To maximize recoveries, claims must be properly presented to both the solvent and insolvent markets.

Recovery from the solvent market is generally approached first, and in some cases it is the only recovery attempted. The recovery of the portion attributed to insolvent insurers is often not seen as worth the effort required to attain it. A myriad of often confusing intricacies of the London market and the perceived low value of such claims mean that not all insureds are willing to take steps to ensure they maximize their returns. Recovery of claims against the insolvent London market is often seen as a logistical nightmare not to be reckoned with.

However, recent experience in the London market shows that significant gains are to be made by those who persevere. Over the past decade, schemes of arrangement have been used as an alternative to liquidation for insolvent carriers. These schemes allow earlier payment to creditors of a percentage of their agreed claims' value. Billions of dollars are currently being paid through these schemes to those with claims against insolvent insurance companies.

Schemes of Arrangement — Market Update

A scheme of arrangement is a compromise between an insurance company and its creditors implemented under Section 425 of the Companies Act 1985.

Schemes are generally one of two types. Often, initially a ìrunoffî scheme is put in place. The runoff scheme is intended to provide for an orderly handling of the existing business of the insolvent company until all present and possible future claims have been dealt with. The aim of this type of scheme is to allow the periodic payment of interim dividends in respect of established claims while retaining cash assets to enable the companies to pay the same percentage interim dividends in respect of all claims established in the future.

An example of a current successful scheme that was initially a runoff scheme is KWELM.

The KWELM scheme was put in place after the demise of five subsidiary insurance companies of London United Investments Plc, namely Kingscroft, Walbrook, El Paso, Lime Street and Mutual Reinsurance ("the KWELM" companies).

The KWELM scheme has been in effect since December 1993. In the past 10 years, the cumulative agreed claims have grown to exceed $3.0 billion. In 2002 alone1 $335 million in claims was processed and agreed. Payout levels from the scheme currently range from 38 percent to 56 percent2 of the total claim values.

At a series of meetings held on January 29, 2004, KWELM creditors voted to implement a revised scheme which includes a cutoff date of September 2004.

A cutoff scheme provides for a claims submission deadline by which creditorsí claims must be filed; failure to do so precludes the creditor from the scheme. The rationale for a cutoff scheme is to value and agree all claims as quickly as possible in order to minimize the costs of dealing with the estate so as to maximize returns and provide an early payment of dividends to unsecured creditors.

In the example of KWELM, this approach translates to total payments that are likely to be in the range of 56 percent to 78 percent within the next two to three years, rather than a payment schedule that was likely to run past 2015.3

The implementation of the cutoff date for KWELM follows the transition of several other runoff schemes to cutoff schemes, and it is expected that the remaining runoff scheme companies will not take long to follow suit. This places a significant responsibility on the insured. It is imperative for an insured, regardless of whether it has reached settlement with the solvent London market, to monitor the position of these companies and to notify its claims prior to any closure cutoff dates.

Scheme Claims

Once notification of a scheme claim has taken place, liabilities of the insolvent insurers must be established by agreement, negotiation or litigation, subject to the dispute procedure set out in the scheme.

Depending on the specific claim and the approach taken, this can range from a straightforward process to ongoing and time-consuming negotiations and potentially even litigation. The liabilities of the insolvent market generally follow on from settlement of the claim with the solvent London market insurers. Complex allocation formulas are used to determine each London market insurerís liability with respect to a single claim. Once the allocation information is agreed upon in the solvent market, it is important that this information and settlement or judgement information be made available to the insolvent insurers to enable settlement of the insolvent portion of the claim.

This is not an automatic process, and without the right approach, lack of solvent market information may hinder the settlement of the claim in the insolvent market. The provision of this information can be key to the success of the claim. To prevent problems regarding the transfer of this information, a co-operation clause can be included in the settlement agreement with the solvent market. This ensures that the solvent London market will cooperate with the insured by assisting in the provision to the scheme administrator of information regarding any insolvent company's share of the total settlement amount and the allocation formula.

The claim can then be negotiated with the insolvent companies. The terms of payment and the percentage of these claims paid are dependent on the financial position of the insolvent company and the type of scheme in operation.

The London Connection

Local London market knowledge can help smooth the claim process by guiding the creditor through the complex and often frustrating environment.

Key elements of success are:

  • ensuring that scheme cutoffs are monitored so that claims are made prior to the closing of any cutoff schemes and generally that notice has been given to the scheme companies;
  • monitoring payout percentages and increases in dividends in conjunction with underlying claims values to determine projected recoveries;
  • including appropriate clauses in settlement agreements to enable information transfer from the solvent to the insolvent market;
  • determining whether to negotiate insolvent claims before or after settlement with the solvent market; and
  • ensuring an effective, knowledgeable approach in the submission and negotiation of claims.

Access to counsel with extensive experience in presenting and negotiating such claims with the insolvent market and who have developed close relationships with scheme administrators and runoff managers can enable these elements to be achieved. Counsel is able to monitor the changing corporate landscape and to conduct the right strategy from the outset. They can provide a road map to creditors which will not only simplify this process, but may also impact on bottom-line corporate profitability.

Commercial prudence dictates that now is the time to act. This will ensure that the opportunities available today are not cut off by some arbitrary date and that creditors are not left with the knowledge that a claim which could have been monetized is simply written off as bad debt.

1 http://www.kwelm.co.uk, viewed Jan. 22, 2004
2 http://www.kwelm.co.uk, viewed Jan. 22, 2004
3 http://www.kwelm.com/pdfs/Press%20Release%2020031215.pdf, viewed Jan. 23, 2003