Andrew Weir Announces Accelerated Closure of Scheme of Arrangement and Bar Date of September 25, 2002 for All Claims

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1 Insurance Coverage July 2002 Andrew Weir Announces Accelerated Closure of Scheme of Arrangement and Bar Date of September 25, 2002 for All Claims In March 2002, the Scheme Creditors of Andrew Weir Insurance Company Limited ( Andrew Weir ), an insolvent London Market insurer, approved a Special Resolution that allows the Scheme Administrator of Andrew Weir to close its Scheme of Arrangement on an accelerated basis. The Scheme Administrator is in the process of distributing Claim Forms to Scheme Creditors, including policyholders, which identify the established claims of each policyholder against Andrew Weir. If a policyholder wishes to challenge information on the Claim Form or file additional claims, it must return the Claim Form and provide support for any claims by September 25, Policyholders are entitled to file contingent and IBNR claims, including long-tail asbestos and environmental claims, which will be valued pursuant to an actuarial process established in the Special Resolution. To preserve their rights against Andrew Weir, policyholders must present detailed information concerning such claims prior to the bar date of September 25, In presenting contingent or IBNR claims to Andrew Weir, however, policyholders should exercise caution to avoid presenting information that may prejudice other insurance claims or contradict public statements concerning the company s potential liabilities. Once all claims are resolved, the Scheme Administrators will declare a final payment percentage and will issue a final scheme payment to all Scheme Creditors with established claims. I. BACKGROUND CONCERNING THE SPECIAL RESOLUTION AND THE ACCELERATED CLOSURE OF ANDREW WEIR Andrew Weir underwrote policies from approximately 1947 until 1991, generally assuming a share of London Market policies along with other London-based insurers. In 1991, Andrew Weir was placed into run-off and subsequently, in 1992, was placed into provisional liquidation. In 1994, the creditors of Andrew Weir approved a Scheme of Arrangement to govern the run-off of the Company. 1 A Scheme of Arrangement is essentially a contract among the creditors of an insolvent insurer that governs the distribution of the assets of the insolvent insurer. 2 Schemes of Arrangement, which have been used by numerous insolvent London insurers in the past decade, differ from American liquidations in many respects. For example, Schemes typically do not impose a bar date on claims, and policyholders generally may file claims at any point during the life of the Scheme. In contrast, in statutory liquidations, the liquidator often establishes a bar date for claims near the outset of the liquidation proceedings. Thus, policyholders with long-tail claims are often able to recover a greater amount under Schemes, because they may file claims when their long-tail claims mature throughout the extended life of the Scheme. 3 In addition, Schemes generally authorize the Scheme Administrator to make periodic payments to creditors for a fixed percentage of agreed claims. This 1 Andrew Weir Insurance Company Limited, Actuarial Estimation Methodology and Claims Agreement Process, prepared by PriceWaterhouseCoopers (Dec. 14, 2001), See Kalis, Reiter, and Segerdahl, Policyholder s Guide to Insurance Coverage Id. Kirkpatrick & Lockhart LLP

2 reserving process allows policyholders with liquidated claims to gain some recovery much earlier in the liquidation process rather than waiting for one payment after all claims have been resolved. 4 For example, the Scheme Administrators of Andrew Weir have handled claims on a rolling basis and have made periodic scheme payments to policyholders with established claims over the past several years in the total amount of 26% of the claims. When Andrew Weir s Scheme was established, the Scheme Administrator recognized that many of Andrew Weir s liabilities arose from long-tail claims that would take years to mature. Given the prevalence of long-tail claims, [i]t was recognised [sic] that at some point in the future, Scheme Creditors might wish to bring the Scheme to an earlier conclusion than would be the case if the natural run-off were to continue. 5 To prepare for such a contingency, Andrew Weir s Scheme contained a provision, known as the Valuation Option, which would permit Scheme Creditors to vote in the future to close the Scheme on an accelerated basis. An Explanatory Memorandum to the Scheme included the following explanation of the Valuation Option: Some of Andrew Weir s Scheme Liabilities have a very long tail... It could be up to 15 years or more before some liabilities mature. In those circumstances it is considered that it might be in the interests of Scheme Creditors as a whole to find a way of bringing the Scheme to an earlier conclusion. One method by which this might be achieved is by providing a once and for all cut-off for all liabilities which have not finally matured and become Established Liabilities. Accordingly, the Scheme contains provisions under which the Scheme Creditors can meet to consider and vote on whether to introduce such a cut-off. The basis of the cut-off would be that all outstanding claims and IBNR claims would be valued as at the cut-off date. If the value cannot be agreed between the creditor and the Scheme Administrator, then it will be referred to adjudication to an independent adjudicator. 6 In December 2001, the Scheme Administrator circulated a notice and proxy materials to all Scheme Creditors recommending that the Scheme Creditors adopt the Valuation Option. In so recommending, the Scheme Administrator stated that it was unlikely that, in the Scheme s present form, Andrew Weir would increase its payment percentage and issue supplemental scheme payments for some time because of low reinsurance cashflow, low claims activity, high APH reserves and a high level of uncertainty. 7 The Scheme Administrator also stated that, even if the Scheme remained open until all of the long-tail claims matured, there was no guarantee that policyholders would receive a larger payment than if the Scheme was closed on an accelerated basis. On March 25, 2002, a requisite majority of Scheme Creditors approved the Special Resolution, although the vote was not unanimous. Given uncertainties with the so-called Valuation process, certain creditors with contingent and unliquidated long-tail claims voted against the Special Resolution. II. THE CLAIMS PROCESS A. Policyholders Must File Claims by September 25, 2002 The Scheme Administrators are in the process of distributing Claim Forms to all Scheme Creditors, including policyholders. The Claim Forms identify all known claims by each policyholder against Andrew Weir, including contingent and IBNR claims. The Scheme Administrators will ask each Scheme Creditor to check the information on their Claim Form, to add any relevant and additional information, and to return the form by the bar date. 8 If a policyholder disputes the amount of any claim identified on the Claim Form or wishes to file additional claims, then it must return the Claim Form and provide details concerning the claim by 4 Id. 5 Special Resolution, B Special Resolution, B Special Resolution, B Special Resolution, B.1.3. Kirkpatrick & Lockhart LLP 2

3 September 25, If a policyholder does not return the Claim Form, the Scheme Administrator will assume that the policyholder has accepted the amount of any claim identified on the Claim Form. 9 According to the Special Resolution, [t]he Scheme Administrator and Scheme Actuary will assess the Claim Form and supporting documentation returned by each Scheme Creditor and will determine whether the Scheme Creditor s claims can be accepted. In doing so, the Scheme Administrator and Scheme Actuary may request additional information or documentation from Scheme Creditors to support their claims. The Scheme Actuary will review Outstanding Losses and IBNR. The Scheme Administrator will review other claims. 10 All Liabilities will be valued at the Valuation Date of December 31, While the Scheme Administrator has reserved the right to consider information submitted by Scheme Creditors after the bar date, he or she is not required to do so. 12 The Scheme Administrator has estimated that it will take four months after the bar date to evaluate all claims. 13 B. Policyholders Are Entitled to Submit Contingent and IBNR Claims, Including Long-Tail Asbestos, Toxic Tort, and Environmental Claims Policyholders are entitled to submit contingent claims and IBNR claims, including claims for longtail liabilities, such as asbestos, toxic tort, and environmental claims. According to the Scheme Administrator, as a result of the passage of the Special Resolution, Andrew Weir will now agree to many long-tail claims that normally would have been deferred for several years as the claims matured. 14 Policyholders will need to present detailed information concerning their claims, including contingent long-tail claims, in the same or substantially the same form as is customary for the insured/reinsured to send to Andrew Weir or the broker. 15 Policyholders should direct any questions concerning what information should be filed to the Scheme Administrator. The Scheme Administrator, however, has provided specific guidelines on what information should be submitted for certain types of claims. For example, with respect to IBNR claims, the Scheme Actuary will review the following: the methodology and assumptions that the policyholder has used to estimate its total ultimate claim amount (and hence how it has estimated IBNR); the policy information that the policyholder has used; and the methodology that the policyholder has used to allocate the total claim amount to each policy (where applicable); and the development of paid and incurred losses to the treaty. 16 With respect to asbestos-related IBNR claims, the Scheme Administrator has recommended that policyholders provide detailed information concerning their claims, including, but not limited to, the following: information about the asbestos product involved and the years in which it was manufactured; information concerning claims made against and paid by the policyholder; and information concerning the policyholder s expenses related to the settlement of claims. 17 With respect to environmental-related IBNR claims, the Scheme Administrator has recommended that policyholders provide detailed information concerning their claims, including, but not limited to, the following: information concerning the sites at issue; information concerning the estimated 9 Notice dated April 8, 2002, available at 10 Special Resolution, C Id., 6.1.8, Id., Id., Id., C Claim Form Guidance Notes, available at A Id. at C Id. at 8. Kirkpatrick & Lockhart LLP 3

4 remediation costs at the site; information concerning the policyholder s share of responsibility for the total remediation costs; information concerning the policyholder s involvement at the site; and information concerning remedial activities at the site. 18 C. The Resolution of Disputed Claims If the Scheme Creditor and Scheme Administrator fail to agree to a claim within a reasonable period of time, then the Scheme Administrator will refer the claim to an Adjudicator. Scheme Creditors may not initiate the Adjudication Process on their own volition. The Adjudicator may request additional information from the Scheme Creditor, the Scheme Administrator, or from Andrew Weir, or may request that the parties attend a hearing with their authorized representatives. 19 The Adjudicator will attempt to resolve all disputes within ninety days. The Adjudicator will not determine the value of disputed claims, but will determine the data that is relevant to the claim. The Scheme Actuary will then determine the value of the claim by applying the Estimation Methodology set forth in the Special Resolution to the data as determined by the Adjudicator. 20 D. Final Scheme Payment As part of the closure of the Scheme, the Scheme Administrator will declare a final payment percentage for all established claims. The Scheme Administrator has not provided any official public estimates of the final payment percentage, and has noted only that the final payment percentage will depend on a number of factors, including the final level of set-off, the amount of reinsurance collected and the value of Andrew Weir s liabilities. 21 As noted above, the current payment percentage is 26%. Policyholders with newly established claims will receive a payment for a portion of their claim based on the final payment percentage. For example, if Andrew Weir agrees to a new claim of $1 million, and sets a final payment percentage of 40%, it would issue a final scheme payment of $400,000. Policyholders that have already received payments for 26% of their established claims will receive a supplemental payment to reflect the amount of the increase of the payment percentage. III. POLICYHOLDERS SHOULD EXERCISE CAUTION A policyholder should consider various business issues before pursuing claims against Andrew Weir. First, in many cases, Andrew Weir assumed only a small portion of the risk insured by the London Market. Policyholders should exercise caution in taking positions that may maximize their recovery against Andrew Weir, but negatively impact a potential larger recovery against the solvent London Market or other insurers. In addition, for various business reasons or to avoid conflicts with reporting requirements, a policyholder may not want to estimate its future contingent liabilities or share its internal projections for such liabilities. IV. CONCLUSION In sum, policyholders should carefully review the Claim Form provided by Andrew Weir and determine whether to pursue claims against this insolvent insurer. If a policyholder decides to pursue such claims, it must provide detailed information prior to the bar date of September 25, GREGORY S. WRIGHT JOHN M. SYLVESTER gwright@kl.com jsylvester@kl.com 18 Id. at Special Resolution, C Id., C Special Resolution, B.5.3. Kirkpatrick & Lockhart LLP 4

5 The Insurance Coverage practice group at Kirkpatrick & Lockhart LLP is one of the nation s largest policyholder-oriented practices. Its attorneys have authored Policyholder s Guide to the Law of Insurance Coverage and edited the Journal of Insurance Coverage. For additional information concerning this topic or Kirkpatrick & Lockhart LLP s insurance coverage practice, please consult the Kirkpatrick & Lockhart LLP office contacts listed below: Boston John M. Edwards jedwards@kl.com Dallas Robert Everett Wolin rwolin@kl.com Harrisburg Raymond P. Pepe rpepe@kl.com Los Angeles David P. Schack dschack@kl.com Miami Daniel A. Casey dcasey@kl.com Newark Anthony La Rocco alarocco@kl.com New York Eugene R. Licker elicker@kl.com Pittsburgh Thomas M. Reiter treiter@kl.com John M. Sylvester jsylvester@kl.com San Francisco Edward Sangster esangster@kl.com Washington Matthew L. Jacobs mjacobs@kl.com Gregory S. Wright gwright@kl.com Kirkpatrick & Lockhart LLP Challenge us. BOSTON... DALLAS HARRISBURG LOS ANGELES MIAMI NEWARK NEW YORK PITTSBURGH SAN FRANCISCO WASHINGTON This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer KIRKPATRICK & LOCKHART LLP. ALL RIGHTS RESERVED.