The Delaware Chancery Court has signed off on the framework that will govern how scores of insurers press claims in the liquidation of Scottish Re (U.S.) Inc., issuing an opinion to spell out when courts must defer to the state insurance commissioner and when they must step in.

Vice Chancellor J. Travis Laster's ruling Friday approved the Delaware Insurance Commissioner's proposed claims and dispute-resolution procedures for the insolvent reinsurer, holding that the court's role is to police legal compliance and avoid second-guessing business and valuation judgments the commissioner makes as receiver.

"This decision holds that the procedures must both comply with law (principally DUILA) and otherwise not constitute an abuse of discretion," Vice Chancellor Laster wrote, referring to Delaware's Uniform Insurance Liquidation Act, which establishes a streamlined, coordinated and orderly statutory scheme for the Delaware Insurance Commissioner to take possession of an insolvent insurer's assets and facilitate the fair and equitable resolution and payment of claims for policyholders and creditors across multiple jurisdictions.

The vice chancellor framed the standard of review as a two-step exercise. Courts must first review the commissioner's decisions de novo for compliance with "positive law" such as constitutions, statutes, regulations and common law, and only then consider whether the commissioner's judgment calls are supported by substantial evidence and free of arbitrariness. Once the commissioner has identified a legal basis, articulated a rationale and built a factual record, the burden shifts to objectors to show that the decision violates law, lacks evidentiary support or constitutes an abuse of discretion, Vice Chancellor Laster said.

He applied that framework both to the commissioner's request for approval of global claims procedures and to future recommendations on individual claims. As to claim determinations, the opinion held that purely legal issues will be reviewed de novo, but that "as to any issue requiring the exercise of judgment or the weighing of evidence, the court will review the commissioner's recommendation under an abuse of discretion standard."

Scottish Re (U.S.), a life and annuity reinsurer headquartered in Charlotte, North Carolina, stopped writing new business in 2008 and went into run-off, backing existing obligations to primary insurers through reinsurance and retrocession agreements. The insurer's financial position worsened after its Cayman and Delaware parent entities entered insolvency proceedings, and in March 2019 the Delaware insurance commissioner obtained a rehabilitation order in Chancery Court. In July 2023, after efforts to save the business failed, the court converted the case to a liquidation, fixed Scottish Re's obligations to its cedents as of Sept. 30, 2023 and imposed antisuit injunctions requiring claims to be funneled through the receivership.

Delaware Insurance Commissioner Trinidad Navarro followed with a series of 2024 motions seeking approval of reinsurance claims procedures, "other claims" procedures, dispute-resolution rules and "final determination" procedures for adjudicating and paying claims. Large blocks of cedent insurers and retrocessionaires objected, raising more than two dozen issues about standards of review, the sequence of the claims process, the use of arbitration clauses, access to information and contractual protections for reinsurers.

Objectors first attacked the commissioner's plan to solicit information from each claimant, issue an initial valuation and then invite the claimant either to accept that number or file a formal claim. They argued that DUILA requires claimants to file first before any evaluation occurs. The court disagreed, holding that "the commissioner's approach does not violate DUILA and is not an abuse of the commissioner's discretion," and declining to hard-wire a more rigid sequence into the statute's silence.

Vice Chancellor Laster likewise declined to bless or condemn specific valuation formulas, holding instead that the commissioner's proposed methodologies were not inherently an abuse of discretion and that fights over how to value particular books of business should wait until concrete recommendations reach the court.

On discovery, insurers had urged the court to allow plenary, litigation-style information demands on the receiver. The vice chancellor rejected that as incompatible with a streamlined liquidation.

"The special nature of the claims proceeding does not accommodate plenary discovery," he wrote, finding the proposed information-sharing mechanism adequate so long as the commissioner uses it in good faith and does not wield noncooperation as a blunt forfeiture tool.

The opinion also turned aside objections that the procedures violate mandatory arbitration clauses in Scottish Re's contracts. DUILA and the court's antisuit injunctions centralize the process in Chancery, and "Delaware's regulatory scheme takes precedence," Vice Chancellor Laster held, though he left room for parties to seek relief from the injunctions in exceptional cases where sending a dispute to arbitration would still comport with liquidation policy.

Retrocessionaires argued that they were contractually entitled to notice of all underlying claims, an opportunity to investigate and a right to assert additional defenses before the commissioner. They further pressed for a ruling that their contracts terminated when Scottish Re's outward-facing reinsurance contracts were cut off.

Laster found that, under Delaware law, those notice-and-participation provisions do not bind the commissioner as receiver and noted that the commissioner had already committed to give reasonable notice, allow reinsurers to investigate at their own expense and raise defenses by objection after recommendations are filed.

"That is all the reinsurers would be entitled to even if Delaware law validated the provisions at issue," he said. He also refused to impose a retrocession termination date, holding that the commissioner's decision "is not contrary to law, nor is it an abuse of discretion."

Beyond the immediate fights, Vice Chancellor Laster used the opinion to criticize Delaware's continued reliance on a 1939-era uniform act that the drafters themselves withdrew as obsolete in 1981, noting that "By not updating its statute and persisting with DUILA, Delaware continues to use a gapridden scheme that the promulgating authority declared obsolete over four decades ago."

Representatives for the parties did not immediately respond to requests for comment Monday.

Delaware Insurance Commissioner Trinidad Navarro, receiver for Scottish Re (U.S.) Inc. is represented by Peter B. Ladig and GianClaudio Finizio of Bayard PA.

Scottish Re (U.S.) Inc. is represented by Michael Busenkell of Gellert Scali Busenkell & Brown LLC.

The insurance companies are represented by Joseph B. Cicero and Gregory E. Stuhlman of Chipman Brown Cicero and Cole LLP, Travis S. Hunter of Richards Layton & Finger PA, Ricardo Palacio, William P. Bowden and Catherine A. Gaul of Ashby & Geddes PA, Kelly A. Green and Jason Miller of Smith Katzenstein & Jenkins LLP, Marisa R. De Feo, Allison Neff, Gary W. Lipkin and Patrick A. Lockwood of Saul Ewing LLP, Randall MacTough and Paul S. Seward of Eckert Seamans Cherin & Mellott LLC, Elizabeth Fenton of Barnes & Thornburg LLP, John C. Phillips and David A. Bilson of Phillips McLaughlin & Hall PA, Jennifer R. Hoover and Noelle Torrice of Benesch Friedlander Coplan & Aronoff LLP, John G. Harris of Halloran Farkas Kittila LLP, Peter C. McGivney of Berger McDermott LLP and Simon Fraser of Cozen O'Connor PC.

The case is In the Matter of the Rehabilitation of Scottish Re (U.S.) Inc., case number 2019-0175, in the Delaware Chancery Court.