Companies insured by excess commercial general liability policies from the 1960s through the 1980s could be in danger of losing a key insurance asset to cover long-tail liabilities dating back decades. Stronghold Insurance Company (Stronghold) recently announced its intention to seek approval of a Solvent Scheme of Arrangement under the English Law. Stronghold’s proposed Scheme is scheduled for initial review and hearing in the next few weeks and – if approved – could foreclose or significantly reduce coverage available to policyholders.
Companies that purchased excess liability coverage from the London Market during Stronghold’s period of coverage (from 1962 to 1985) could very well be insured under a policy subscribed to or issued by Stronghold. Companies with Stronghold insurance should closely review how the Scheme could affect their rights to coverage. In particular, Stronghold’s insureds likely will have a very brief window – potentially as soon as October 9, 2018 – to assert any objection to Stronghold’s proposed Scheme. Moreover, if the Scheme is approved, insureds will have a limited time to submit a claim for payment – after which they will be forever barred from obtaining any coverage from Stronghold.
Detailed information concerning the proposed Scheme, related procedures and key dates is available at Stronghold’s web site.
As a London Market Insurance company, Stronghold underwrote excess and stop loss coverage for insureds from 1962 through 1985. During this time, U.S.-based companies (including those with manufacturing and industrial operations) commonly purchased insurance issued by London Market companies like Stronghold as a component of their excess liability insurance programs. These policies typically were written to provide coverage for an “occurrence” – such as a release of pollutants or exposure to disease – that takes place during the term of the policy. For several decades, corporate policyholders have obtained significant coverage under these policies for long-tail or latent-injury claims and suits alleging liability for environmental pollution, asbestos exposure and other mass torts.
Partly because of the volume and high value of these claims, Stronghold ceased issuing new coverage in 1985 and entered into run-off – focusing its operations on paying claims under its historic policies. But Stronghold recently failed to meet minimum capital requirements imposed by English law. As a result, last month it issued a letter to potential insureds and their representatives announcing its intention seek to conclude its run-off and wind down its operations by obtaining approval of a Scheme.
Explaining solvent schemes
A solvent scheme of arrangement is a common method used by UK-based insurers to close up shop. It is a statutory procedure under English law that allows an insurance company to bring finality to its business by accelerating the payment of claims under its policies according to detailed timing and valuation formulas. When a scheme is approved by a court, insureds must submit requests for payment of claims by a specific bar date and typically are prevented from contesting an award for their claim in courts or by arbitration. Once amounts owed are reimbursed according to the Scheme formula, the insurance company is released from future claims and any obligations under its policies and typically winds down its operations.
Policyholders have sometimes objected to proposed schemes on the grounds that they improperly reduce the coverage available for claims. Others have argued that insurers that are still solvent should not be able to avoid handling and paying claims in the regular course of business – and avoid defending their coverage decisions in court should a dispute arise over coverage. On the other hand, insurers seeking approval of a scheme (including Stronghold) often assert that such arrangements preserve money for the payment of claims by reducing the amount of administrative costs that would be incurred over several years of managing a run-off.
Procedure for approving Stronghold’s Scheme
Stronghold intends to request permission to pursue its Scheme during an initial hearing that the company currently expects to occur on October 9, 2018. According to Stronghold, claimants are entitled to attend and be represented at the initial hearing and issues not raised at the initial hearing could be waived.
If the court permits Stronghold to pursue a Scheme, a “Scheme Meeting” will be held at which claimants will vote on the proposed Scheme. Stronghold currently expects this hearing to occur in January 2019. In order for the Scheme to be implemented, it must be supported by a majority – representing no less than 75 percent in value – of claimants voting at the meeting.
If the Scheme is supported by the requisite majority of claimants at the Scheme Meeting, a court will determine at a second hearing whether to “sanction,” i.e., “approve” the Scheme. As with the first hearing, claimants are entitled to attend, be represented and raise objections to the Scheme.
Stronghold says that it will draw to the court’s attention any concerns raised by claimants communicated to it in writing prior to either hearing, and claimants with questions, concerns or objections to the Scheme are encouraged to reach out to Stronghold using the contact information listed at the end of this Alert.
If the court approves the Scheme, claims against Stronghold must be submitted no later than six months from the approval date. Stronghold currently expects that submission deadline to be sometime in July 2019.
Information concerning the proposed Scheme, related procedures and key dates is available at Stronghold’s web site. Next steps for policyholders
Payouts under the proposed Scheme should apply to claims already submitted to Stronghold, and to claims incurred but not already reported to the insurer. Companies with losses/occurrences implicating policies covering the years 1962–1985 should attempt to quickly determine whether they are insured under coverage issued or subscribed to by Stronghold. Such information may be located by reviewing the companies’ historic policies in their internal files (including policy schedules listing insurers that have “subscribed” to the policy) or the files of their insurance brokers. Companies and brokers also may have rosters of policies that could list insurance carriers that issued historic coverage. Other secondary evidence – such as correspondence or even interviews with current or former employees – also may reveal coverage issued by Stronghold. Companies also should consider whether they may be insured under Stronghold policies issued to former parent companies or affiliates.
Companies insured under Stronghold policies that have not already been exhausted by payment of claims – or subject to a buyout with the carrier – should consider whether such coverage would potentially respond to any losses that have been incurred but not already reported to Stronghold. If there is a potential for coverage (or if claims already have been submitted to Stronghold for payment) companies should closely review the information available on Stronghold’s website (see above and below) concerning the Scheme and consider retaining insurance coverage counsel to advise on whether and how to contest the Scheme and/or to submit a claim and maximize their chances for coverage should a Scheme go forward.
The team of insurance recovery attorneys and analysts at Reed Smith have decades of experience in identifying, reconstructing and recovering historic insurance assets and representing policyholders in contesting or maximizing coverage in connection with solvent schemes of arrangement.