Insurers in financial difficulties Contractual Termination Rights
Insurers will typically hold both supply contracts (contracts to supply the firm with goods or services), and financial contracts, such as bank loans. Both types of contracts can include ‘ipso facto’ clauses, which allow counterparties to terminate the contract if the insurer enters insolvency, restructuring or similar proceedings, or otherwise comes under financial distress, even if the insurer continues to meet its obligations to that counterparty (such as making payments on time).17 Entry into the write-down process (or other procedures that are likely to be under consideration around the same time, such as administration or winding-up) may thus allow a firm’s suppliers and financial counterparties to terminate contracts. Early termination of supply contracts could disrupt the ongoing viability of a struggling insurer, hindering attempts to avoid a disorderly failure. Early termination of financial contracts could suddenly expose an insurer to significant risks, leading to further financial deterioration. In both cases, these termination rights could increase the risk of adverse outcomes for an insurer’s policyholders and other creditors.
	The Act introduces a new ‘moratorium’ which will temporarily prevent suppliers and some financial contract counterparties from using this type of termination clause, while an insurer is undergoing certain insolvency or write-down procedures. The moratorium will apply during administration, during a write-down process under the new provisions replacing section 377 of FSMA 2000 (for an initial six-month period, with the possibility of extensions by the court), and while there is an outstanding petition for winding-up in relation to the insurer (but not once a winding-up order is granted by the court). In the write-down context, the moratorium will not prevent counterparties terminating for non-performance (e.g., where the insurer fails to make payments or meet any of its other obligations under the contract). The scope of the write-down is also designed to ensure that financial counterparties are generally not written-down at all, and suppliers are not written-down in respect of ongoing supplies, ensuring that parties ‘locked-in’ by the moratorium are generally able to expect payment and ongoing performance from the firm. The Act also empowers the court to grant exemptions from the effect of the moratorium where it would otherwise be likely to cause hardship for affected parties.
	The moratorium will apply by default to all supply contracts and most financial contracts; certain arrangements in financial contracts will be excluded to protect parties’ risk management practices. In particular, the moratorium will not affect ‘protected arrangements’ as defined in section 48P Banking Act 2009. In individual cases, the court will be able to narrow the scope of the moratorium, to remove contracts from its scope where the court is satisfied that not doing so will cause hardship, or where to do so will lead to a better outcome for creditors (or, where relevant, promote the purpose of administration). The Act also gives HM Treasury a power to alter the scope of the moratorium by regulation made by statutory instrument under the draft affirmative procedure (Paragraph 12 of Schedule 19C to FSMA 2000). This will allow the government to update the scope of the moratorium as needed, in response to market practice and any corresponding developments in insolvency law.