Several tort claims were made against T & N Limited (“the Insured”) arising out of its use of asbestos. As a consequence it became unlikely to be able to pay its debts. Administrators were appointed for the purposes of approving a scheme of arrangement under section 425 of the Companies Act 1985. The Insured held an asbestos liability policy under which insurers agreed to indemnify the company against its ultimate net loss (which was defined to include both established liabilities under the asbestos claims and the costs of defending and handling those claims) up to a limit of £500 million. It was a condition of the insurance policy that after the occurrence of an insolvency event insurers should have the exclusive right to handle and defend claims. The loss was wholly reinsured. In a related decision in February 2005, the Court of Appeal held that claims handling rights were transferred to Reinsurers at the time of the administration order.

Based on existing case law, it was accepted that in handling claims (re)insurers act as agents for the company and are entitled to reimbursement for their expenses. The question in this case was whether the right to reimbursement for any such costs incurred after the appointment of an administrator had statutory priority over other costs of the administration, the floating charge and the company’s unsecured creditors.

The basis for such an argument was section 19(5) of the Insolvency Act 1986 which gives priority to any debts or liabilities incurred under contracts entered by an administrator in carrying out his functions. Reinsurers argued that section 19(5) applied to claims handling expenses incurred after the appointment of the administrator, since a company in administration could only act via its administrator. Accordingly, any liabilities incurred on behalf of a company in administration must have been incurred on behalf of the administrator.

The Court of Appeal had accepted Reinsurer’s arguments, ie, that claims handling expenses amounted to liabilities incurred by the administrator in carrying out his functions under section 19(5). The House of Lords disagreed. Whilst it is true that once an administrator has been appointed only he can act or confer authority to act on behalf of the company, that does not mean that anyone with authority to act on behalf of the company must be deemed to have derived authority from the administrator. Before the appointment of the administrator the company may have conferred authority to contract on its behalf, which in law or in practice the administrator cannot revoke. This was such a case. The claims handling costs had been incurred by the company and not the administrator.

Further, the House of Lords could see no reason of policy why claims handling expenses should be given priority over the company’s other debts.

The court in exercising its supervisory powers over an administration has a broad discretion to authorise or direct an administrator to make payments or enter into contracts for the purposes of the administration. This could include that certain claims handling expenditures incurred by (re)insurers have priority. The House of Lords considered that it would be unusual for a court to make such a decision, as (re)insurers want to handle claims to protect their own interests, which has little to do with the purposes of the administration. In any event, there was insufficient evidence of the particular claims handling costs in this case to assess whether it would be appropriate to exercise this discretion. The House of Lords upheld the first instance decision of Mr Justice Blackburne who had refused to make a blanket order authorising the payment of the claims handling expenditure. Comment Clearly the House of Lords decision that claims handling costs incurred by (re)insurers will not constitute a cost of the administration, so will not be given priority over an insolvent company’s other debts, is not one which will be welcomed by (re)insurers. It appears that in future (re)insurers will generally only be able to obtain reimbursement for claims handling expenses incurred after an insolvency event, if there is money available to pay some or all of the ordinary unsecured liabilities or, if appropriate, by exercising a right of set off against any liability of (re)insurers to indemnify the (re)insured in respect of the claims being handled.