PROVIDENCE, R.I.—Tapping a Rhode Island statute, an attempt by a solvent reinsurer to execute a U.K.-style commutation process in the United States has passed its first legal hurdle.

If successful, the plan would enable the reinsurer to wind up its business quickly and avoid a lengthy runoff or liquidation. It's unclear, however, whether the commutation technique will gain widespread favor in the United States and be used by other reinsurers and insurers.

At a hearing last week, GTE Reinsurance Co. Ltd., a reinsurer based in Providence, R.I., won court approval to convene a meeting of creditors and secured a voting date for Nov. 30 for creditors to vote on the commutation plan.

Commutation plans for solvent insurers, such as the one proposed by GTE Re, are the U.S. equivalent to the U.K. regulatory mechanism known as a solvent scheme of arrangement. The schemes have gained popularity, particularly in the United Kingdom, as a tool to run off and restructure solvent and insolvent insurers. However, the approach often is controversial for solvent insurers, particularly among U.S.-based policyholders who argue the plans erase decades of valuable occurrence-based coverage.

Borrowing language from the U.K. Companies Act, Rhode Island in 2002 passed legislation allowing “voluntary restructuring of solvent insurers,” enabling a solvent commercial lines insurer or reinsurer to settle quickly its outstanding liabilities for past and future claims and terminate its business. Solvent U.S. insurers seeking to terminate business have few options, experts say, and typically enter runoff, where they can spend decades trying to wind down business in an orderly fashion.

A commutation plan, however, offers a variety of advantages, its proponents say, including early payment of claims. In addition, the plan offers a mechanism to achieve “claims agreement,” relying on an independent adjudicator to ensure claims are valued fairly, according to the plan documents.

Although “on the books” for eight years, no insurer has attempted to use the law until now, largely because of widespread uncertainty, observers said. However, several insurers have redomiciled to Rhode Island in recent years as a preliminary maneuver, observers said.

GTE Re was formed in Bermuda in 1976, as a wholly owned subsidiary of GTE Corp, although after a series of mergers, Verizon Communications Inc. now is its ultimate parent. In addition to GTE exposures, the company reinsured third-party property/casualty risks of U.S. and international insurers, including pools, via quota share, excess of loss and loss portfolio transfer contracts, all of which have been in runoff since 1990. The company redomiciled to Vermont in 1994 and subsequently Rhode Island this year.

The commutation plan has been approved by the Insurance Division of Rhode Island's Department of Business Regulation. Joseph Torti III, deputy director and superintendent of Insurance, said GTE Re is the “ideal candidate” to test the process because it is has well-developed reinsurance portfolio, that has been in runoff for a long time. In addition, GTE Re has proposed a “straightforward and transparent plan to honorably discharge all of its reinsurance liabilities,” he said.

Given the debate in the U.S. over solvent schemes, the GTE Re plan has the potential to raise concerns. However, legal experts said this particular plan is not likely to be perceived as controversial, because it involves a reinsurance company and its cedents—rather than a primary insurance company and its policyholders, essentially making it a “different game,” they say.

The plan is likely to find support from its creditors, legal experts say, because primary insurers are accustomed to doing commutations. U.S.-based policyholders, however, are very interested in keeping coverage in place, said William Greaney, partner with Covington & Burling L.L.P. in Washington, who is not involved in the current plan. Therefore, any attempt by a primary insurer to use the Rhode Island statute to promulgate a similar plan likely would face widespread opposition from U.S.-based policyholders, they say.

In order to be sanctioned by the court, the plan must have the support of the majority of voting creditors, and those in favor of the plan must represent 75% of the value of its liabilities.

The plan's independent adviser, Andrew Rothseid, of RunOff Resolve L.L.C. said it already has secured support of cedents comprising almost 60% of GTE Re's total reserves, which in 2009 stood at $58 million.

Mr. Torti said he is “optimistic” the plan will be successful, and hopes it “opens the door” for additional plans to be put forth.