FEDERAL COURT OF AUSTRALIA

Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) [2013] FCA 983

THE COURT ORDERS THAT:

1.    The need for the applicant to comply with s 17C(2)(c) of the Insurance Act 1973 (Cth) be dispensed with provided that the applicant complies with orders 2 through 5 below.

2.    The applicant cause a copy of the summary of the schemes approved by the Australian Prudential Regulation Authority (the Approved Summary) to be sent by prepaid post to:

(a)    each of the policyholders identified in the Final Policyholder Register as described in the affidavit of Lee Barson sworn on 18 September 2013 (the Barson Affidavit);

(b)    each of the brokers and pool managers identified in the Broker List as described in the affidavit of Veronica Atley sworn on 17 September 2013;

(c)    each of the brokers and pool managers identified in the Final Policyholder Register as described in the Barson Affidavit; and

(d)    each of the policyholders, brokers and pool managers identified as a result of the review described in paragraph 44 of the Barson Affidavit.

3.    The applicant cause a copy of the Approved Summary, the Scheme documents, the notice of intention as approved by the Australian Prudential Regulation Authority (the Approved Notice) and the actuarial report on which the Schemes are based to be posted on and available for downloading from the website: www.enstardivision3a.com.au/iag.

4.    The applicant cause a copy of the Approved Notice to be published in the following newspapers:

(a)    The Australian;

(b)    The Australian Financial Review; and

(c)    The International Financial Times.

5.    The applicant make available for inspection for a period of 15 days between the hours of 9.00 am and 5.00 pm local time Monday to Friday (other than public holidays) at the London office of Enstar Group Limited (America Square, 6th Floor, 2 America Square, London EC3N 2LU) a copy of the Approved Summary, the Scheme documents, the Approved Notice and the actuarial report on which the Schemes are based.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    The applicant, Gordian RunOff Limited (GRO), seeks, pursuant to s 17C(5) of the Insurance Act 1973 (Cth) (the Act), the Court’s dispensation with the need for compliance with s 17C(2)(c) of the Act in respect of three proposed schemes. The schemes involve the transfer to GRO of certain parts of the inwards reinsurance and inwards retrocession business (the business) of IAG Re Australia Limited, CGU Insurance Limited (CGU) and CGU-VACC Insurance Limited.

Background

2    GRO proposes to seek an order for confirmation of each scheme pursuant to s 17F of the Act. Section 17C(2)(c) of the Act provides that an application for confirmation may not be made unless an approved summary of the scheme has been given to every affected policyholder.

3    The business is identified in the proposed Deed of Transfer in the following terms:

(a)    each of the contracts of inwards reinsurance and inwards retrocession issued to the Policyholders as listed in the Register, entered into by or on behalf of a Transferor in the capacity as reinsurer or retrocessionaire, as applicable, on or before the Sale Date; and

(b)    if not listed in the Register, any other contracts of inwards reinsurance or inwards retrocession entered into by or on behalf of a Transferor, in their own capacity or as one of the entities listed in Schedule 6, as reinsurer or retrocessionaire, as applicable, on or before the Sale Date and which are covered by LPT, or in the event of termination of the LPT, would have been so covered but for the termination or the application of any limits therein,

but in any event not including those contracts listed in Schedule 3 to this Deed and not including any other intra-group contracts of inwards reinsurance or inwards retrocession entered into by IAG Re as reinsurer or retrocessionaire, as applicable, and any of its Related Bodies Corporate as reinsureds or retrocedants, as applicable.

4    The reference to “LPT” is to a loss portfolio transfer agreement that was entered into between predecessors to the transferring companies and Aviva International Insurance Limited (later to become Aviva Insurance Limited) (Aviva), under which Aviva acts as a reinsurer. By a related agreement, Aviva has undertaken the management of the business since 2004. By a further agreement, Aviva Canada Inc (Aviva Canada) has agreed to provide run-off management services on behalf of Aviva, as required. Aviva and Aviva Canada have been assisted in the management of the business by Bruce Harris, an independent Melbourne-based consultant.

5    It can be seen, therefore, that Aviva manages the business and has assumed the ultimate economic risk associated with it. The ultimate effect of the proposed schemes, if confirmed, will be that the business will be transferred to GRO and the present reinsurance and management arrangements with Aviva will cease. The management and ultimate economic risk of the business will then fall on GRO.

6    The business comprises all the inwards reinsurance and inwards retrocession contracts reinsured under the LPT. Paragraph (b) of the definition quoted above in [3] refers, in general terms, to contracts covered by the LPT. The LPT defines contracts reinsured by it as follows:

(a)    the contracts of reinsurance and/or retrocession referred to in the Inwards Re Report (the Initial Contracts); and

(b)    any other contracts of reinsurance or retrocession entered into by or on behalf of the Reinsured at any time prior to Completion which are of materially the same nature as the Initial Contracts and/or which might reasonably be viewed as having been within the scope or contemplation of the Inwards Re Report.

7    The present difficulty is the inability of the transferring companies and GRO to identify exhaustively the contracts of reinsurance or retrocession that fall within the generally-expressed definition in (b) quoted above in [6].

8    There are three matters to note at this point.

9    First, the business is in run-off. It is comprised of risks underwritten between 1958 and about 1997. The evidence reveals that the number of claims in relation to the relevant policies has reduced from $7.99 million as at 30 November 2004 to $1.17 million as at 31 May 2013.

10    Secondly, as the business is comprised entirely of inwards reinsurance and inwards retrocession contracts, all of the policyholders are insurance companies. There are no retail policyholders. Moreover, the vast majority of policyholders are overseas.

11    Thirdly, part of the business comprises reinsurance written from 1967 to 1977 by a pool known as Australian World Underwriters (the AWU Pool). The AWU Pool comprises international and Australian insurers and reinsurers. The business written by the AWU Pool includes property and liability insurance. The liabilities currently faced by that pool relate to long-tail asbestos, pollution and aggregate health hazard related product claims. A number of the pool members were predecessors of Insurance Australia Group Limited (IAG). As a result of various corporate restructures within the IAG group of companies, the business, including that part written by the AWU Pool, is currently held by the transferring companies. The fact that part of the business arises from participation in a pool has exacerbated the problem of identifying, exhaustively, all relevant policyholders.

12    Because the transferring companies and GRO are unable to identify all affected policyholders (as that expression is understood in the context of s 17C of the Act: see Re Westport Insurance Corporation (No 2) (2009) 181 FCR 530 at [48]), GRO is concerned about its ability to comply with the requirement of s 17C(2)(c) of the Act to give “every” affected policyholder an approved summary of the schemes. It seeks a general dispensation with the requirements of s 17C(2)(c) provided it takes other steps designed to bring the proposed schemes to the attention of all affected policyholders.

13    The following affidavits were read in support of the application:

(a)    Lee Barson sworn 18 September 2013. Mr Barson is the Assumed Reinsurance and Ceded Reinsurance Manager at Enstar Australia Limited, the corporate agent of GRO.

(b)    Richard Parker sworn 16 September 2013. Mr Parker is the Special Projects Manager in Group Reinsurance at the Aviva group. His responsibilities include the management of the general insurance business and arrangements in run-off within Aviva.

(c)    Aurora Argana sworn 16 September 2013. Ms Argana is the Manager of Assumed and Third Party Management at Aviva Canada. She is responsible for the day-to-day management of the accounting and claims administration relating to assumed run-off, including regulatory filings of third party managed run-off companies.

(d)    Veronica Atley sworn 17 September 2013. Ms Atley is the Senior Manager in Reinsurance Claims at IAG. Her responsibilities include the management of IAG’s reinsurance claims.

(e)    Bruce Gordon Harris sworn 17 September 2013. As I have noted, Mr Harris is an independent consultant. He was formerly employed by CGU as Director, Business Services. In that role, he was responsible for the actuarial, business risk, claims policy, compliance, legal, secretarial and reinsurance functions of CGU. Since May 2004, he has been engaged by Aviva Canada as a consultant on the business, insofar as it relates to claims made by or payable to Australian cedants.

14    The evidence deals in some considerable detail with the steps that have been taken to identify the policies affected by the proposed schemes. Given the history of the business, and the number of parties that have been involved in its management since the business was underwritten, it has been necessary to collate data held by a number of sources, based in a number of different locations. This involved input from each of the deponents. Each has described the efforts that she or he has made to search, locate, verify and compile lists of affected policyholders. No useful purpose would be served by me seeking to summarise the detail of the evidence they have given. It is sufficient to record that I am satisfied that reasonable steps have been taken to identify all affected policyholders. It is clear on the evidence that the identities of all affected policyholders are not known but, in light of the steps taken thus far to identify affected policyholders, there appear to be no further steps reasonably available that would elicit further information in that regard.

15    The efforts undertaken by all concerned have culminated in the creation of what has been described in the evidence as a Final Policyholder Register (the Register), which is as complete as it reasonably can be as at 27 June 2013. The Register falls into two parts: the first dealing with “International Business” and the second dealing with the AWU Pool. Given the passage of time since the Register was finalised, it is proposed that there be a review directed to the most recent claims and correspondence relating to the business, to ascertain whether any new information is available. If it is, the information will be added to the Register before any contact is made with policyholders in relation to the proposed transfer of the business.

Consideration

16    The granting of dispensation pursuant to s 17C(5) of the Act is a matter of considerable importance and should not be regarded as a matter of course: Challenger Life Limited [2004] FCA 618 at [2]-[3]; Munich Reinsurance Company of Australasia Limited [2004] FCA 1391 at [4]. The plain policy intention is that every affected policyholder should be given a summary of the scheme and an opportunity to make submissions to the Court in respect of it on a confirmation application: The Application of Commonwealth Life Ltd & Anor [2003] FCA 501 at [8]; see also Westport Insurance Corporation, in the matter of Westport Insurance Corporation [2009] FCA 1357 at [38]-[39]; HDI-Gerling Australia Insurance Company Pty Limited, in the matter of HDI-Gerling Australia Insurance Company Pty Limited (ABN 16 069 085 196) [2010] FCA 505 at [38]-[39]. The application for dispensation in the present case is not directed to relief from a requirement that might be considered burdensome in particular circumstances. Rather, it is made in recognition that, despite the various inquiries that have been made, it is possible that not every affected policyholder is known. Thus, in a real and practical sense, there is no way of knowing whether purported compliance with s 17C(2)(c) of the Act would be complete compliance, despite efforts directed to that end. Such a case is plainly deserving of a favourable exercise of the discretion, provided the Court can be satisfied that all reasonable efforts have been made to identify all affected policyholders. I am satisfied that that has been done in the present case.

17    GRO submitted that dispensation should be granted for the following reasons.

18    First, a copy of the summary of the schemes will be sent to every policyholder and every relevant broker and pool manager identified in the Register as well as any other relevant policyholder identified as part of the proposed review to which I have referred.

19    Secondly, additional advertising and notification steps have been proposed which should bring the proposed schemes to the attention of all affected policyholders. These steps comprise publication of notice regarding the schemes in The Australian newspaper and the Australian Financial Review, which circulate in every State and Territory in Australia, and in the Financial Times, which circulates in the United Kingdom, where a number of the identified affected policyholders reside. As required in any event, notice regarding the schemes will be published in the Government Gazette. Further, the scheme documents will be available for download from a website hosted by Enstar Australia and copies of the scheme documents will be available for inspection for a period of 15 days at locations approved by the Australian Prudential Regulation Authority (APRA) in each State and Territory, as well as in London. The additional steps taken to draw the schemes to the attention of affected policyholders favours the granting of a dispensation order under s 17C(5) of the Act: In the matter of GIO Personal Investment Services Ltd and AMP Life Ltd [2000] FCA 1871 at [18]; Commonwealth Life at [10]; Challenger at [5]; Calliden Group Limited in the matter of Calliden Group Limited [2007] FCA 2019 at [62]; Westport at [44]-[46]; HDI-Gerling at [43]-[44].

20    Thirdly, a draft actuarial report on which the schemes are based indicates that the interests of policyholders will not be adversely affected by the schemes as, among other things, they will be joining a run-off insurer with, generally, a higher level of solvency coverage than the transferring companies. This opinion, albeit provisional at the present time, suggests a somewhat diminished likelihood that substantial objections would be made to the schemes at a confirmation hearing, at least on grounds relating to the solvency profile of GRO as the prospective transferee of the business.

21    Fourthly, the affected policyholders are all insurance companies that can be taken to have sophisticated management used to dealing with different reinsurers and brokers. If there is any valid objection to the schemes then it is likely that such an objection would find voice from among those whose identity as an affected policyholder has been ascertained and who will be served with a summary of the schemes.

22    Fifthly, the making of a dispensation order under s 17C(5) of the Act does not in any way fetter or restrict APRA’s role in assessing and scrutinising every aspect of the schemes, nor does it limit in any way the exercise of the Court’s discretion at a confirmation hearing. Any perceived deficiency in the notification of policyholders, even where it is done in accordance with dispensation orders, may be taken into account by the Court in determining whether to give its approval.

23    Finally, and importantly, APRA, who appeared on the application, does not oppose the conditional dispensation that has been sought.

24    I accept these submissions. They provide cogent reasons why the practical difficulty facing the transferring companies and GRO in identifying affected policyholders should be addressed by appropriate conditional dispensation orders. Subject to anything that might emerge at a confirmation hearing, I am satisfied that the steps that have been proposed to bring the schemes to the attention of affected policyholders are suitable and, in the circumstances, sufficient.

Disposition

25    Orders, as sought, should be made.

Associate:

Dated:    27 September 2013