The recent decision by the High Court in PA(GI) v GICL 2013 Limited and Cigna insurance Services (Europe) Limited underlines the importance of identifying and dealing with insurance business liabilities in an insurance business transfer scheme and, crucially, ensuring that the scheme drafting adequately reflects the parties’ intentions.
The case involved a dispute over whether liabilities for PPI mis-selling had been effectively transferred from PAGI to Groupama under the terms of a Part VII insurance business transfer scheme (scheme) sanctioned by the Court in 2006. The Scheme provided that “Transferred Liabilities” means “all liabilities of the Transferor…under or attaching to the Transferred Policies”. Cigna was made a party to the application because both PAGI and Groupama have provisional claims to be indemnified by Cigna in respect of any claims made against them for mis-selling. The court was not concerned with the detail of these indemnities but their existence was a material factor to be taken into account in the construction of the terms of the scheme.
Although PAGI accepted that any fine by the Financial Conduct Authority (FCA) for PPI mis-selling relating to the transferred policies was not included in the definition of “Transferred Liabilities”, PAGI argued that “under or attaching to” included liabilities arising from Financial Ombudsman Service (FOS) decisions in relation to such PPI mis-selling.
The court disagreed with PAGI and decided that the FOS liabilities did not arise “under” the transferred policies and that the natural interpretation of the phrase “attaching to the Transferred Policies” did not capture the FOS liabilities either. It concluded that this decision was aligned with the “overall purpose of the 2006 scheme and business common sense”. There was no commercial imperative that meant the court should adopt an unnatural interpretation of the scheme and it was “inherently unlikely that if the parties did have an intention to transfer liability for mis-selling claims to Groupama, they would have kept quiet about it”. Therefore, the insurer responsible for mis-selling claims before the FOS was held to be PAGI and not Groupama.
The message is clear: the scheme document needs to spell out in express terms how the parties wish to deal with liabilities. These days, it is much more common for scheme documents to use a wider definition of “Transferred Liabilities” as meaning “liabilities relating to the Transferred Business” or similar which, as Cigna submitted, would have been wide enough to transfer the FOS liabilities. However, it is nonetheless incumbent upon the parties to ensure that the terms and definitions used are appropriate for the particular circumstances of the scheme. The UK regulators are, of course, sensitive to these issues as well, particularly given the potential risks and impact on policyholders.
Whether the parties to a new scheme intend liabilities to remain with the transferor or transfer to the transferee, they will need to ensure that the scheme is explicit on the matter, the position is clear to all of those affected and that the regulators and courts are satisfied that policyholders (including former policyholders and those whose policies are not transferring) are not unfairly disadvantaged by such approach to such an extent that the scheme should not go ahead. If there is a real possibility that policyholders might be adversely affected by this (for example, where there is any doubt about the transferor having sufficient resources to compensate former policyholders or where the potential burden of compensation impacts the security of the existing policyholders of the transferee), the risk of regulatory objection or a refusal by the court to sanction the scheme rises significantly. As well as ensuring that the drafting reflects the intentions of the parties, a robust communications strategy and a reasoned justification for the chosen strategy would be crucial in order to keep the transaction on track.
But perhaps the real lesson from this dispute is the one illustrated by the position of Ageas Insurance Ltd, which was not formally a party to the proceedings but agreed to be bound by the court’s decision.
In 2013, Groupama transferred the PAGI business by way of a further Part VII transfer to Ageas. It is not clear from the PAGI judgment how far the 2013 Ageas Part VII scheme mirrored the 2006 Groupama scheme and/or whether Ageas also obtained an indemnity from Cigna in relation to PPI mis-selling. In any event, we suspect that Ageas is pleased with the outcome in this case as it means it is not exposed to the PPI mis-selling liabilities in question and there is no need for Ageas to review the terms of the 2013 scheme. Ageas’s position demonstrates the importance of conducting proper due diligence when acquiring a portfolio of insurance business, particularly where that business is already subject to an insurance business transfer scheme.