ABI Business Reorganization Committee
Subcommittee on Insurance, Construction & Surety
This article is in conjunction with the author’s presentation at this committee’s Winter Leadership Conference meeting, December 3, 2004, 3:45 p.m. All law references are to English law unless otherwise expressly stated.
U.S. insurance and U.S. insolvency lawyers are increasingly alive to business opportunities in international insurance insolvency. What opportunities in particular?
London Insurance Market
Many U.S. corporations are insured—and many U.S. insurance corporations are reinsured—by London insurers. Nowadays, at any one time, dozens of London market insurance companies that were previously solvency-cleared by U.K. insurance regulators will be found languishing in various English restructuring processes, especially administration (Insolvency Act 1986, s.8) and scheme of arrangement (Companies Act 1985, s.425). A specialist insurance insolvency Bar is slowly evolving in London, although some lawyers have a long way to go to catch up on state-of-the-art thinking developed by others on insolvency at Lloyd’s and Equitas Re. The Council of the European Union has recently promulgated a directive about insurer insolvency (Council Directive 2001/17/EC, March 19, 2001) on the reorganisation and winding-up of insurance undertakings), which materially affects payouts to policyholders by insolvent London insurers.
The London insurance market gives rise to numerous cross-border issues. For example, English courts are now agreeable to exercising insolvency jurisdiction over foreign companies—see recently, for example, Re Drax Holdings Ltd; Re InPower Ltd. [2003] EWHC 2743 (Ch) (Lawrence Collins J)—including those with U.S. parents (a recent example is Quincy Mutual Fire Insurance Co. [2004] EWHC 1594 (Ch) (Laddie J)). Cross-border issues will continue to arise in relation to concurrent multi-jurisdictional insolvency processes and how to protect claims payment securitisation funds such as trust funds and letters of credit. Another general opportunity is for U.S. bankruptcy trustees of U.S. policyholders to seek out and claim on the latters’ London insurance cover. In inexpert hands, that cover is often given away.
London Run-off Industry
Whatever the cause of so many apparently wholly unforeseable London insurer insolvencies—regulator negligence, auditor fraud, last-minute bad deals, failure of outward reinsurers—an industry of third-party service providers is now well established in London to run off their liabilities. There is even a market in buying defunct insurers, necessarily at under-value, with a view to running off their liabilities profitably. London insurer insolvency is beginning to be big business, creating more opportunities for insurance insolvency lawyers.
The London Dark Horse
The perennial dark horse of the London market, the Lloyd’s enterprise and its curious front-man Equitas Re, continues to give concern in relation to solvency. The Lloyd’s enterprise announced recently Lloyd’s intention to raise ‘approximately £500m of long-term subordinated debt’, for which it will apply for a London Stock Exchange listing. A thriving business making genuine profits, with a sound capital structure and no hidden liabilities, does not need to raise that sort of money. The manouevre—talked up before it has even happened by compliant credit rating agencies that know little or nothing of how the Lloyd’s enterprise really works—is probably intended to bolster the Lloyd’s enterprise’s Central Fund in the event it is hit by liabilities presently reinsured by Equitas Re.
Those liabilities are presently off the Lloyd’s enterprise’s balance sheet but could bounce right back there, either discretionarily through recent GAAP-oriented Financial Services Authority rules or compulsorily through Spitzer-style regulatory reconsideration of the 1996 Reconstruction & Renewal deal, which created Equitas Re in the first place. Insolvency for Equitas Re (which Equitas Re itself has been insistently predicting for years, to deafening silence from local insurance regulators) and ultimately for the supposedly ‘profitable’ Lloyd’s enterprise—especially if corporate members of Lloyd’s do not or cannot sufficiently fund a sufficient Lloyd’s Central Fund—could be just round the corner, providing meal tickets for U.S. insurance lawyers for the next five to ten years, especially in relation to possible material shortchanging of U.S. policyholders (especially if the latter then become insolvent) by the Lloyd’s enterprise acting through Equitas Re.
Finally, a Cautionary Note
It is absolutely essential for the U.S. lawyer not to even try to give legal or factual information or advice on any aspect of the London insurance market without acquiring or buying in the expertise necessary to do it properly. Many U.S. insurance lawyers seem determined to give themselves away to genuine experts (but sadly not to their uninformed clients) by speaking of (for example) the “Society of Lloyd’s” (no such legal entity), of an entity called “Lloyd’s of London” (ditto), of “Lloyd’s” selling insurance (it doesn’t), of Lloyd’s being a ‘market’ (it isn’t), of “syndicates” selling insurance (they don’t), of a ‘syndicate’ having ‘members’ or ‘participants’ (wrong again), and ‘British law’ (no such thing). Some London briefs, London discovery requests and London deposition questions are embarrassingly misguided.
When the fancy U.S. lawyer, keen to impress the client with his settlement prowess, thus flies into London by the seat of his g-string, London insurers smile into their sleeves at his lack of credibility and his dishonesty. Doing nothing to correct his substantive errors about how the London market actually works, they lull him in settlement negotiations into believing his own deception by raising their settlement offer—within a margin that we might call the Duplicity Zone—by an amount suggesting material responsiveness (had the assured’s lawyer been genuinely effective, the settlement offer would have been exponentially greater).
The assured’s lawyer, handed the opportunity by the London insurer to look good to his client, is then able to give his client the false impression that he was ‘effective’ and ‘commercial’ in London and got a ‘good result’ justifying his fee. In return for the favour, the lawyer does not press the insurer, as a genuine expert would have done. Time is fast running out—in both the back and front offices—on this style of Trans-Atlantic legal practice, especially with Spitzer and others on the alert. Even today there is considerable room for a genuinely expert U.S. insurance lawyer to practise with both profit and honour in London insurance transactions.