Vol 13 (2016) - Issue 2

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Orion’s Final Bow

On 29 October 2015, the English High Court sanctioned closure schemes of arrangement for The Orion Insurance Company PLC (now OIC Run-Off Limited) (Orion) and its wholly owned subsidiary, The London and Overseas Insurance Company PLC (now known as The London and Overseas Insurance Company Limited) (L&O). The approval of these schemes of arrangement is a significant milestone both for the creditors of Orion and L&O and the London insurance market. It is the climax of in excess of 10 years’ work by the Scheme Administrators (partners and consultants in PricewaterhouseCoopers LLP) and their UK legal advisers (Hogan Lovells) in an insolvency that has taken 21 years of painstaking effort to resolve. The schemes are expected to become effective early in 2016, subject to their recognition under Chapter 15 of the US Bankruptcy Code.
The insolvencies of Orion and L&O are widely acknowledged to be among the longest and most complex of the series of London Market insurer and reinsurer insolvencies that started in the 1990s. To address these complexities (which are in some cases without precedent), the schemes have a unique hybrid structure which incorporate features of both insolvent and solvent schemes of arrangement. These complexities and the novel structure of the schemes are explained in greater detail below.

1. Background
History of the companies
Orion and L&O were incorporated in 1931 and 1893 respectively.
Both companies traded for many decades as insurance companies. Orion principally wrote aviation, marine, non-marine and personal line business (including motor business). Orion also had smaller accounts in commercial and healthcare business. L&O wrote aviation, marine, transit and property damage business. Both Orion’s and L&O’s business was written primarily in the London Market.
The companies insured and reinsured companies and other corporate entities throughout the world, but in particular in the US. At that time, it was common for US corporations to seek their primary insurance in the US market, obtaining excess layer insurance from the London Market. This excess layer insurance would be shared between a number of insurers in London, with each of Orion and L&O therefore underwriting only a proportion of the risk. As a result, both companies had a large number of corporate policyholders resident in the US, whose long-tail claims (most notably relating to asbestos and pollution) now form the bulk of the outstanding liabilities of the companies’ estates.
By the late 1980s and continuing into the early 1990s, the companies began to experience financial difficulties. These difficulties were caused in particular by an increase in asbestos and pollution claims resulting from risks underwritten for policyholders resident in the US and exposure to a number of catastrophes which occurred at that time (notably the European storms of 1987 and 1990, Exxon Valdez (1989), Hurricane Hugo (1989) and the Iraqi invasion of Kuwait (1990)). In 1992, Orion and L&O ceased writing new business and went into run-off. In 1994 the companies went into provisional liquidation.

The Institute of London Underwriters (ILU)
One of the complicating features of the companies is that most of their marine and aviation business was written through the ILU. The ILU acted as a trade association representing the interests of aviation, marine and transport underwriters based in London from 1884 until 1998. The ILU took an active role in the day to day business of the London Market as well as the traditional policy role of other market entities. Membership of the ILU was confined to companies underwriting marine, aviation or transport insurance business in London, London being defined as meaning within five miles of the Royal Exchange.
Where an ILU member company was a subsidiary within a group of companies, the ILU would usually seek to obtain a parent company guarantee of the liabilities of that member company in favour of policyholders with policies signed and issued through the ILU on that member company’s behalf. This requirement was not a formal condition of ILU membership but was sought by the Committee of the ILU as part of its general discretion in admitting (or retaining) a member.