On 9 December 2011, the New Zealand High Court held in Ruscoe v Canterbury Policy Holders HC WN CIV 2011-485-1535 that a charge under section 9(1) of the Law Reform Act 1936 (the LRA) applied so as to give Canterbury first charge over the proceeds of reinsurance. This follows the earlier New Zealand High Court decision in Bridgecorp1, where it was held that section 9 of the LRA prevented directors who were insured under a D&O policy from accessing defence costs because a charge had been placed over those proceeds.
The Applicants, the Liquidators of Western Pacific Insurance Limited (Western Pacific) applied to the Court for orders regarding the distribution of proceeds of reinsurance. The Liquidators submitted that the proceeds were available to all claimants and unsecured creditors. The Respondent, Canterbury Policy Holders (Canterbury) contended that section 9(1) of the LRA applied so as to give them first charge over the proceeds of reinsurance.
Western Pacific went into liquidation on 1 April 2011. Unsettled claims totalled approximately $60 million. An estimated two thirds of the value of those claims were said to relate to claims arising from the Christchurch earthquakes.
The earthquake claims triggered Western Pacific’s catastrophe reinsurance treaty for both 2010 and 2011. The maximum cover available for both years was $33 million. The treaties provided that the money was payable even if Western Pacific (the reinsured) became insolvent. Canterbury contended that the proceeds of reinsurance were available just to those whose claims triggered the reinsurance.
For section 9(1) of the LRA to apply, Western Pacific must have entered into a “contract of insurance”, by which it was “indemnified against liability to pay any damages or compensation”.
The Liquidators submitted that the requirements section 9(1) were not met because:
- The reinsurance was of the original subject matter and not an insurance of Western Pacific’s liability in relation to the policy; and
- The liability of Western Pacific to the original insured was not a liability to pay damages or compensation.
The New Zealand High Court held that reinsurance contracts were included within the meaning of “contract of insurance” on the basis that they had not been expressly excluded from the ambit of the LRA. His Honour noted a tendency for legislation to expressly exclude reinsurance if there was to be “a special rule”2. Further, there was nothing in legislative history that would support the interpretation that section 9(1) of the LRA did not apply to reinsurance.
France J determined that liability to pay compensation was broad enough to apply to this reinsurance situation on the basis that Western Pacific agreed to indemnify its policyholders for loss they suffered within the terms of the original policy, which was considered to be an obligation to compensate them.
His Honour held that the reinsurance treaties were triggered by Western Pacific’s liability to pay compensation to Canterbury and section 9(1) of the Act says that those policy holders have a charge on the reinsurance money that had become payable in respect of that liability.
Application to Australia
There is no authority in Australia on the NSW equivalent legislation (section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW)) applying to contracts of reinsurance.
However, in Ruscoe v Canterbury, France J referred to a number of Australian decisions that support the position that, in the absence of any express exclusions, legislation referring to insurance contracts applies also to reinsurance contracts: see Re Dominion Insurance Co of Australia Limited  1 NSWLR 271.
Further, in HIH Casualty & General Insurance Ltd (in liq) v Wallace (2006) 68 NSWLR 603, Justice Einstein held the term “contract of insurance” in section 19 of the Insurance Act 1902 (NSW) included contracts of reinsurance. Therefore, although it is untested, it appears that section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) may apply to reinsurance contacts as well as to insurance contracts.