Your insurer goes bust – can you as an insured claim the reinsurance proceeds? An important decision in the NSW Supreme Court gives useful guidance on when a court will allow departures from the statutory scheme controlling the application of reinsurance proceeds (Amaca Pty Ltd v McGrath & Anor as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90).

The insurer goes broke, and there are all these claimants at the door…

Amaca and the other plaintiffs are subject to insolvent external administration. They are also subject to claims from people with asbestos-related illnesses. Their ability to meet liabilities to asbestos victims, as and when those liabilities are established, depends in part on obtaining insurance proceeds.

Unfortunately, the insurer, HIH, is also in liquidation.

The plaintiffs wanted the court to order two things:

  • first, they wanted it to exercise its power under section 562A(4) of the Corporations Act 2001 (Cth) to change the application of the reinsurance proceeds already in hand, with the effect that the amounts would be applied exclusively towards satisfaction of the plaintiffs' debts or claims cognisable in the winding up;
  • secondly, they wanted this order to extend to moneys yet to be received by the liquidators, and to control how they are to be applied if and when received.

HIH's liquidators neither consented to nor opposed the first aspect of the plaintiffs' claim, but they did oppose the application as it related to moneys to be received in the future.

The relevant law: section 562A of the Corporations Act 2001 (Cth)

Section 562A only applies to insurance companies: if an insolvent insurance company has reinsurance, the proceeds of that reinsurance are to be distributed to the holders of the relevant insurance policies.

As a result, reinsurance proceeds are quarantined from the general pooling of assets and pari passu distribution among all unsecured creditors.

Subsections (2) and (3) set out the general rules of distribution. The crucial subsection in this case was subsection (4), which allows the court to override the statutory scheme if it is considered to be "just and equitable in the circumstances", which is what Amaca was asking for here. The factors that a court may take into account in making an order under subsection (4) are set out in subsection (5).

The money in hand and severe prejudice

One of the factors a court may consider when it is asked to make an order under section 562A(4) is "whether a person to whom an amount is payable under a relevant contract of insurance would be severely prejudiced if subsections (2) and (3) applied to the amount received under the contract of reinsurance."

What is severe prejudice? For example, in this case, does it matter if asbestos claimants would get less money if the scheme were not altered? Not according to Justice Barrett: while their position is socially important, it is not relevant to whether an order under section 562A(4) ought to be made.

Neither is it relevant that an order would reduce the money that would have to be contributed by other sources, including the new Hardie Group or government loans.

The only relevant consideration here was that the reinsurance was designed to benefit the plaintiffs because it would offset the theoretical exposure of the insurer, and that they would be denied that benefit if the scheme were not altered. It would be just and equitable therefore to make the order requested relating to the money in hand.

What about the money yet to arrive?

That is another question entirely, said Justice Barrett. No court has the power to make an order under section 562A(4) with respect to future proceeds of reinsurance policies. The purpose of the section is to allow the liquidators to depart from the statutory scheme because of current circumstances. By the time the future proceeds are in hand, circumstance could have changed.