Policyholders Disfavored for Insurance Insolvencies: Swaps Given a Preferred Position Via Offsets

This Mayer Brown Global Insurance bulletin includes an interesting but disturbing section on insurance insolvencies and swaps.  The gist is that some states are enacting statutes which in essence give some financial creditors a preferred position ahead of insureds when an insurer becomes insolvent. The preference is granted via statues which give legal effect to set-off provisions  in financial swap contracts.  AIG, of course, is infamous for almost collapsing under the burden of credit default swaps it wrote.

No doubt the financial industry offers plenty of rationales for why they should be so favored. Unfortunately, a resulting reality is that preferred positions and specialized treatments tend to leave policyholders unpaid. The ongoing AMBAC insolvency, described in this post, is an example of certain assets and liabilities receiving specialized treatment, arguably to the detriment of policyholders in general.  Policyholders are thus being disfavored by state legislatures.  In essence, the offsets create a new class of almost secured creditors, but policyholders are not given notice of or compensation for the taking of their rights. A cynic might argue that due process and takings clauses are being ignored when it comes to policyholder rights and insurance. 

Hat tip to Lexology for broadcasting this news of the subpart of the bulletin.

Published Reports - UK Government Seeking a Deal With Unions on Pleural Plaques

This article from a British newspaper reports that the UK government is trying to cut a deal with unions 1) to pay for more scientific research on cancer, and 2) require more compensation from insurers for asbestos victims, but without reinstating pleural plaques claiming. Apparently remaining insurers would be required to pay bills left behind by insolvent insurers. On reading the article, one wonders about linkage between this development and the insurance industry's 8 January 2010 resounding loss in Scotland as various insurers failed to overturn legislation reinstating claiming for pleural plaques in Scotland. 

According to today's article:

"Asbestos victims offered £70m support package


Unions divided on plan to set up a research centre and compensation fund - because of exclusions

By Emily Dugan

The Government is set to present a £70m package of help for asbestos victims to trade unions this week. The proposals include setting up a research centre into asbestos-linked diseases; insisting insurers fund compensation for dying victims unable to rely on their employers' insurance; and more money for sufferers of the deadly asbestos cancer mesothelioma.


The proposals, campaigned for by the IoS, are likely to receive a mixed reaction from campaigners seeking justice for thousands of workers who face painful deaths because of negligent exposure by their employers.


The fund and research centre were welcomed last night, but opponents were quick to criticise the Government's decision not to overturn a 2007 law lords' ruling which left sufferers of a condition known as pleural plaques ineligible for compensation. The condition is often a sign of the onset of deadly asbestos diseases.

The proposals were outlined in a private meeting between Gordon Brown, the Justice Secretary, Jack Straw, and concerned MPs last week. Sources confirmed that if accepted by the unions, the plans would be rapidly adopted. But the construction union UCATT called the proposals "morally indefensible".

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The establishment of an Employers Liability Insurance Bureau to maintain a "fund of last resort" for victims of asbestos exposure who cannot trace their employers' insurers is the most significant victory, as it will be mainly paid for by the insurance industry.
 
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Mr Straw is understood to have said that overturning the pleural plaque ruling would be too costly, with the Government already facing liabilities of up to £600m because so many public sector workers were exposed to asbestos in previously nationalised industries and in the Armed Forces. Critics believe ministers have surrendered to the powerful insurance lobby.

Andrew Dismore MP, who tabled two bills to overturn the 2007 ruling, said: "If you've got pleural plaques, there's nothing in this package for you. What's on offer is not chicken feed, but it will mean there are lots of people who will not get the compensation they deserve."