(Article from Insurance Law Alert, December 2025)
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Holding
In an insolvent reinsurer’s liquidation proceedings, a deferential standard applies under which the state Insurance Commissioner’s proposed procedures must comply with state law and must not constitute an abuse of discretion, and objectors must establish that the plan violates law or lacks evidentiary support. In the Matter of the Rehab. of Scottish Re (U.S.) Inc., 2025 Del. Ch. LEXIS 2045 (Del. Chanc. Ct. Nov. 28, 2025).
Background
Scottish Re, a reinsurer, entered insolvency proceedings and the Delaware Insurance Commissioner obtained a rehabilitation order. After attempts to salvage the business failed, the court converted the case to a liquidation, fixing Scottish Re’s financial obligations and imposing antisuit injunctions and requiring all claims to be handled through the receivership.
The Insurance Commissioner filed a series of motions seeking approval of various procedures including the following: reinsurance claims procedures, “other claims” procedures, dispute resolution rules, and “final determination” procedures for adjudicating and paying claims. Numerous parties objected and raised the question of the appropriate standard of review for the Commissioner’s decisions and various elements of the claims process.
Decision
The court ruled that in determining whether to adopt the procedures proposed by the Commissioner, the appropriate standard of review is whether “the procedures comply with [state] law . . . and otherwise do not constitute an abuse of discretion.” The court set forth a two-step procedure: First, the Commissioner must establish a prima facie case for deference by “identify[ing] a source of authority, articulat[ing] a rationale for the relief and creat[ing] a factual record that supports the proffered rationale.” If such a showing is made, the burden shifts to the objecting party to demonstrate “that (i) the Commissioner lacked authority to make the decision or that the decision does not comply with applicable law, (ii) the Commissioner’s rationale does not have substantial evidentiary support, or (iii) the decision constitutes an abuse of discretion.”
With respect to the Commissioner’s claim recommendations, the court held that for any issues relating to legal compliance, a de novo standard applies. However, for any issues requiring the exercise of judgment or the weighing of evidence, an abuse of discretion standard applies.
Applying this framework, the court concluded that the Commissioner’s proposal under which the Commission solicits information from each claimant and then sends each claimant an initial assessment of the claim value which may be accepted or rejected by the claimant did not violate Delaware’s Uniform Insurance Liquidation Act (“DUILA”) and was not an abuse of discretion. The objectors argued that under DUILA, claimants must first file a claim prior to any evaluation by the Commissioner. Rejecting this contention, the court concluded that the approach did not constitute an abuse of discretion, particularly given the absence of a particular order set forth in DUILA.
Additionally, the court rejected the objectors’ contention that the Commissioner’s valuation methodology in making assessments constitutes an abuse of discretion. The court declined to endorse or invalidate any specific valuation formulas, but rather reasoned that the proposed methodologies were within the Commissioner’s discretion.
Finally, the court ruled that contrary to the objectors’ assertion, the proposed claim procedures (which do not contemplate arbitration notwithstanding the inclusion of arbitration provisions in certain contracts) did not violate the DUILA. The court explained: “A claimant who believes a claim should be arbitrated may ask the court to lift the antisuit injunctions barring litigation or arbitration outside of the liquidation process. The court will do so only when resolving a claim outside the liquidation process comports with DUILA and its policy goals.”
Comments
The court rejected a host of other objections related to access to information, the reinsurers’ contractual rights to receive notice of and investigate claims, and the appropriate retrocession termination date, finding that none of the Commissioner’s proposed procedures constituted an abuse of discretion or violation of law and/or that the Commissioner was not bound by contractual provisions in his capacity as receiver.
The decision highlights two important principles: the Commissioner’s broad discretion in making decisions in the context of a receivership (and other insolvency-based proceedings) and the inefficiency and unpredictability of insurance receivership proceedings in Delaware.
As to the latter point, the court emphasized the need for statutory reform in this context, stating:
It is hard to understand why Delaware would hold fast to a statutory scheme that became obsolete four decades ago, but that is the choice that the General Assembly has made . . . . The Commissioner would be the natural champion for a new statute, but an obsolete statute that says little imposes few constraints, giving the Commissioner wide latitude. Insurance companies would benefit from greater clarity, but operating companies would have to see value in lobbying for an updated insolvency statute. The statutory improvements would only benefit insurers who became insolvent or regularly participated in insolvencies. For a solvent company to devote resources to improving Delaware’s insolvency regime could send mixed signals about its own viability or exposure, and solvent companies have better places to invest their resources.
As the court noted, more than thirty states have adopted a “second-generation” statute containing components of the Insurers Rehabilitation and Liquidation Model Act of 1968, and several states have adopted in whole or in part a “third-generation” statute, the Insurer Receivership Model Act promulgated in 2005. Delaware has adopted neither.