Long-term Business Transfer Scheme May Be Used To Release Third Party Guarantors

• Published date: 12 July 2022
• Subject Matter: Insurance, Insurance Laws and Products
• Law Firm: Kennedys Law LLP
• Author: Mr Nick Miles

Third-party guarantors of the liabilities of a long-term insurer may be released if the insurer's long-term business is transferred to a new insurer using section 25 of Bermuda's Insurance Act 1978 ('Insurance Act').

Overview of section 25

Section 25 of the Insurance Act ('Section 25') provides for the jurisdiction of the Supreme Court of Bermuda ('Supreme Court') to sanction schemes for the transfer of long-term business from one insurer to another ('long-term business transfer scheme' or 'transfer scheme'). The section is a longstanding feature of Bermuda's insurance legislation and is similar to provisions found in the insurance legislation of many other jurisdictions. When sanctioned, a long-term business transfer scheme transfers the primary legal liability of the transferor insurer to its policyholders to the transferee, giving the transferor complete legal and economic finality. As well as the sanction of the Supreme Court, the procedure requires procuring an opinion of an approved actuary to the effect that policyholders would not be materially adversely affected by the transfer, the no-objection of the Bermuda Monetary Authority and proof of notification of the intended transfer to policyholders. Section 25 is an essential tool for long-term insurers in runoff seeking exit strategies or for use in the consolidation of insurance groups. Numerous long-term business transfer schemes have been sanctioned by the Supreme Court of Bermuda over the decades.

The facts of Re Amedex

In Re Amedex Insurance Company (Bermuda) Ltd. [2022] SC (Bda) 48 Com (1 July 2022), the Supreme Court considered a petition to sanction a long-term business transfer scheme that included an unusual feature releasing a third party guarantor of the petitioner's ('Amedex') liabilities. The transfer scheme sought to transfer all of the in-force business of Amedex to AmFirst Life Insurance Company, I.I., an insurer registered and supervised in Puerto Rico. An affiliate of Amedex had guaranteed the obligations of Amedex to its policyholders. Clearly, the transfer scheme would not provide the necessary finality if as a result it did not bring about a release of the guarantor (not least having regard to the potential for indemnity claims against Amedex being brought by the guarantor should the guarantee be invoked by a policyholder).

The decision of the Supreme Court

While the release of guarantors has been achieved in Schemes of Arrangement under the Companies Act 1981, it has not...