On 1 September 2009 the Insurance Regulation 2004 (NSW) (Regulation) was repealed and replaced with the Insurance Regulation 2009 (NSW). The new provisions have significant implications for providers of reinsurance, and bring New South Wales (NSW) in line with other State and Commonwealth insurance legislation concerning reinsurance.
As the Explanatory Note makes clear, the Regulation is largely the same as its predecessor, but reinsurance is now included as a class of insurance contract exempt from certain sections of the Insurance Act 1902 (NSW).
The relevant text of Regulation 4(b) now reads:
‘Contracts of insurance that are subject to the Insurance Contracts Act 1984 of the Commonwealth and contracts of reinsurance are exempt from the operation of section 18, 18A, 18B and 19 of the Act.’
Prior to the amendments, sections 18, 18A, 18B and 19 have proved problematic for reinsurers in NSW. These provisions were originally designed to remedy perceived inequalities between an unsophisticated insured and a commercial insurer in a situation of direct insurance. However, judicial findings that the Act applied to contracts of reinsurance has, in the past meant that in NSW the reinsured has been at an advantage during reinsurance contract disputes.
To understand the advantage, it is appropriate to review the relevant sections of the Insurance Act 1902:
In any dispute arising out of a contract of insurance, the court may excuse a failure by the insured to observe or perform a term or condition of the contract, if it appears to the court that the insurer was not prejudiced by the failure.
Contracts of insurance can remain in force where misrepresentation or omission led to the contract being entered into, unless the statement or omission was material to the insurer, and the action was fraudulent or deliberate, or the insured knew or ought to have known that the statement or matter was material to the insurer in relation to the contract.
Where the provisions of a contract of insurance limit liability of the insurer to indemnify the insured on the happening of particular events or circumstances, and that event or circumstance arises, the insured shall remain indemnified if the applicable loss was not caused or contributed to by the occurrence of those events or circumstances.
The insured is not bound by any provisions in the contract of insurance that required the submission to arbitration of any matter arising out of the contract of insurance.
There have been two significant cases considering the application of these sections in the NSW Supreme Court.
In the decision of Einstein J in HIH Casualty & General Insurance Ltd (in liquidation) v Wallace , it was held that “insurance” for the purposes of the Act included reinsurance. As a consequence, section 19 of the Act applied to reinsurance contracts in NSW, and arbitration clauses in the reinsurance contract in question were not binding on the reinsured.
In Westport Insurance Corporation v Gordian Runoff Ltd , Einstein J followed his previous decision on the application of the Act and clarified the operation of section 18B. He held that section 18B is concerned with policy exclusions or limitations, which are triggered by a particular event or circumstance, where loss is causally unrelated to that event or circumstance. The section could not be concerned with the underlying scope of cover.
The Regulation now places reinsurance with other exempted classes of contracts such as marine insurance, life insurance, or any contract of insurance subject to the Insurance Contracts Act 1984(Cth). It should be noted that the Regulation does not apply to reinsurance contracts entered into before 1 September 2009.