11 February 2008
Can the liquidator of an insurer avoid the requirement to forward reinsurance payouts to the parties it has insured?
A recent NSW Supreme Court decision (re HIH Insurance Limited [2008] NSWSC 9) raises this tantalising possibility - but leaves some vital issues hanging in the air.
Background
HIH took out reinsurance as agent for its subsidiary insurance companies. The premiums were paid by two of those subsidiaries.
The HIH group went into liquidation. Under the terms of the reinsurance contract, there was a deadline by which HIH had to give notice if it wanted to commute the contract.
No notice was given by the deadline. Nevertheless, HIH's liquidators and the reinsurer negotiated a termination of the reinsurance. Under the termination agreement, the reinsurer would pay a large sum of money to HIH (in settlement of "all existing and potential claims").
The liquidators wanted to distribute that money to the two subsidiaries which had paid the premiums. Before giving the go-ahead, the Court had to consider whether the payment was subject to section 562A (ie. was directly payable to claimants under insurance policies issued by the HIH subsidiaries).
Section 562A did not apply
The Court said that section 562A did not apply.
It started from the proposition that only the two subsidiaries which had paid the premiums were entitled to the benefit of the payout. It then held that section 562A did not apply to the payout, for two reasons:
(1) There was no evidence that either subsidiary had incurred a liability (under an insurance contract) that was covered by the reinsurance.
(2) The payout had not been received "under the contract of reinsurance" (section 562A(1)(b)). It had been received under a contract that was not the original contract of reinsurance:
"the parties to the [reinsurance contract] simply decided to put an end to it. Having negotiated terms upon which the existing contract was to be terminated and releases were to be given, they embodied those terms in a new contract to which they then committed themselves. To the extent that those terms entailed the payment and receipt of money, the payment and receipt were `under' the new contract [as opposed to the reinsurance contract]."
Implications
This decision must be treated with caution.
It appears to say that section 562A will not apply to a payment received under an agreement to terminate a reinsurance contract (because that payment is not contemplated by the reinsurance contract itself).
The $64,000 (or, in this particular case, $214 million) question then is: can section 562A be avoided simply by terminating the reinsurance contract and negotiating a payment under a separate termination contract?
One obvious stumbling block is the fact that the relevant HIH subsidiaries did not have any insurance liabilities at the time of the termination. It is far from certain that a court would be willing to waive section 562A if the insurer was facing claims at the time of termination of the reinsurance. This could result in a broader judicial interpretation of what constitutes a payment "under" a reinsurance contract. On the other hand, a future court may take the view that this is a bridge too far, and that the only way to rope in this type of termination payment is by an amendment to section 562A itself.
