ALLSOP CJ:
1 The matters before the Court are two interlocutory applications for orders pursuant to s 17C(5) of the Insurance Act 1973 (Cth) (the Act) dispensing with the rigours of s 17C(2)(c) on certain conditions. This application is prefatory to the hearing for confirmation under s 17B(1)(b) of the Act of two schemes for transfer of certain insurance business by the applicants, being the Australian branch of Great Lakes Insurance SE, trading as Great Lakes Australia (ABN 18 964 580 576) (GLA) and the Australian branch of HSB Engineering Insurance Limited (ABN 24 076 158 962) (HSBEI and HSB, the latter denoting the Australian branch).
2 I deal with both applications for dispensation under s 17C(5) in these reasons. The applications made pursuant to Division 3A of Part III of the Act are for confirmation of proposed schemes for the transfer of certain Australian run-off business of GLA and HSB to Gordian RunOff Ltd (ABN 11 052 179 647) (Gordian). Each scheme is separate but the schemes are being prepared and brought forward concurrently.
3 Each of GLA and HSB is a general insurer licensed to carry on insurance business in Australia and is owned ultimately by the well-known and large German insurer and reinsurer Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft (Munich Re).
4 Gordian is also a general insurer licensed to carry on insurance business in Australia and is a subsidiary of Enstar Group Ltd, a company registered in Bermuda, publicly traded on the NASDAQ index. Gordian specialises in the managing of run-off insurance business - that is, managing claims, insurance and reinsurance recoveries and subrogated claim recoveries when new insurance is not being written.
5 GLA's business includes general insurance written by managing general agents. It also includes the insurance business underwritten by Calliden Insurance Limited (CIL) that was vested in GLA in 2017 by way of a scheme under Division 3A of the Act. Munich Re has decided to transfer certain run-off business in GLA, being that written by nine managing general agents and the CIL business. All the business is in run-off; that is no new risks are being written and the only operations being claims handling, reinsurance recoveries and subrogated recovery claims.
6 The purpose of the GLA scheme is to transfer non-core portfolios of the run-off business in order, it is said, to release management time and attention and gain "economic finality and elimination of volatility" in connection with the legacy run-off portfolios which are subject to the transfers. It is unnecessary for present purposes of the dispensation hearing to explore the nature of the "volatility" to which reference was made in both submissions and in the evidence. That may await the confirmation hearing. It is sufficient, however, to understand that in respect of GLA some insurance business and assets and liabilities (and so, policyholders) remain with GLA and some (the transferring run-off business) are to be transferred to Gordian.
7 The HSB scheme is one to transfer all of HSB's Australian general insurance business (also all in run-off) to Gordian. Thus, there are intended to be no remaining business or policyholders of HSB upon the effectuation of the HSB scheme. In respect of HSB the objective is said to be to achieve finality for the Australian branch of the insurer which is now very small. In effect, it is the cleaning out of the business of HSB and there will be no business or assets or liabilities remaining.
8 The business of GLA being transferred consists of various lines of insurance business being home builders warranty insurance, personal lines and motor lease guarantee business, all three being vested to GLA under the CIL scheme; and construction insurance, commercial business insurance and professional indemnity insurance written by the nine managing general agents.
9 HSBEI underwrites engineering lines with risks primarily located in the United Kingdom and Europe. It wrote similar business in Australia through HSB until 2017. The business written in Australia was construction all risks, construction plant and equipment, erections all risks, machinery breakdown, and construction business written by an underwriting agency, Ensurance Underwriting Pty Ltd.
10 By s 17B(1)(a) of the Act, no part of the business of a general insurer may be transferred to another general insurer except under a scheme confirmed by the Court. Under s 17C(2)(c) an application for confirmation of a scheme may not be made unless a summary of the scheme approved by the Australian Prudential Regulation Authority (APRA) has been given to "every affected policyholder."
11 The phrase "affected policyholder" is defined in s 17C(1) as meaning for that section "the holder of a policy affected by a scheme". This meaning, concerned as it is with the subject matter of s 17C being the steps to be taken before application for confirmation, was discussed by Lindgren J in Re Insurance Australia Ltd [2004] FCA 524; 139 FCR 450 [19]-[20]. His Honour concluded that the phrase meant the holder of a policy being transferred under the scheme, and not the holder of a policy that was in some way affected by the scheme taking place. For the purposes of s 17C that interpretation has not been doubted. It does not mean, however, that when the time comes for confirmation the position of policyholders (at least Australian policyholders) not being transferred are not relevant. The effect of the transfer on the policyholders remaining with the transferor insurer, or the effect of the transfer on the existing pre-transfer policyholders of the transferee insurer may be relevant to the decision to confirm with or without modifications, or not to confirm, under s 17F of the Act.
12 Section 17C(5) permits the Court to dispense with the need to give the approved summary to every policyholder of business that is transferred "if it is satisfied that because of the nature of the circumstances attending its preparation, it is not necessary that the paragraph be complied with."
13 The question of dispensation is one of some importance: Munich Reinsurance Company of Australasia Limited [2004] FCA 1391 at [4]. The purpose, of course, is to give notice to persons (being affected policyholders) who may wish to object to the scheme as proposed: see Re Commonwealth Life Ltd [2003] FCA 501 at [8].
14 The difficulty that may arise, as it does here, is where there are a large number of policies and policyholders the subject of the transfer and there is difficulty in identifying all of the policyholders and where the likely practical utility in contacting all of them is questionable. For instance, as here, where there are a significant number of years of business written, with many or most of the policies expired, but the possibility of claims by the policyholders still existing, one must decide how to balance an appropriate degree of individual notifications with cost and practical utility. There may be a very large administrative burden and cost in complying with s 17C(2)(c), but very little, if any, real practical benefit. Thus, it is usual for those promoting a scheme (here Munich Re and Gordian) to approach the Court (having already consulted and gained the approval or lack of opposition of APRA) to limit the service of the summary to a class or classes of affected policyholders which is or are practicable in all the circumstances and, together with other measures of publicity and dissemination of information about the scheme, permit the conclusion that anyone who has or is likely to have an interest in the confirmation of the scheme is made aware of it. The Court and those preparing schemes should not, however, lose sight of the statutory policy underlying s 17C(2)(c) which is to give every affected policyholder a summary of the scheme and an opportunity to make submissions: Re Commonwealth Life Ltd [2003] FCA 501 at [8].
15 The dispensation and confirmation hearings are affected by APRA's known requirements in a document called GPS 410. GPS 410 contains certain requirements for public inspection of the scheme. Because of the restrictions on movement imposed by the COVID-19 pandemic APRA took the view that the public inspection requirements of GPS 410 should be modified. Thus, it released determination A1 of 2020 altering GPS 410 in an "Individual Prudential Standard" which affects these two schemes, and one other unrelated scheme. This provides for a telephone inspection period during which affected policyholders can request a physical copy of the scheme documents.
16 The steps that are proposed by GLA, HSB, Munich Re and Gordian satisfy all aspects of GPS 410 as modified by the Individual Prudential Standard of determination A1 of 2020. APRA has been consulted closely in relation to the schemes and the notification to policyholder strategy (referred to below as the "Communications Strategies") since the early days of the proposal and APRA has considered the scheme documents and notification proposal by its supervision, actuarial and legal teams. APRA has no objection to the orders sought by way of dispensation.
17 Thus it is for the Court in light of the evidence and APRA's position to consider whether dispensation with the full rigour of s 17C(2)(c) be permitted - that such is "not necessary", and subject to what conditions.
18 The evidence for the dispensation hearing was itself affected by the pandemic. I heard the matter accepting unsworn affidavits on condition that they be sworn or affirmed by the deponents as soon as reasonably practicable, and before the confirmation hearing. The deponents of relevant evidence were Ms Louise De Beus, a project manager employed by an Australian Munich Re subsidiary who is responsible for the management of the proposed GLA scheme, though she also gave relevant evidence about the HSB scheme; Ms Anya O'Reilly, the finance director of HSBEI who is responsible for the management of the proposed HSB scheme though she also gave evidence about the GLA scheme; and two actuaries, Mr Geoff Atkins and Mr Kaise Stephan.
19 The primary consideration for this dispensation hearing is the practicable and fair comprehensiveness of the proposed notification to affected policyholders.
20 The GLA business to be transferred (described generally at [8] above) was set out in para 16 of Ms De Beus' affidavit, as follows:
(a) all insurance business underwritten on behalf of GLA by Hollard Commercial Insurance Pty Ltd (Hollard) (formerly named Calibre Commercial Insurance Pty Ltd);
(b) all insurance business previously underwritten by [Calliden] and vested in GLA under the [Calliden] Scheme;
(c) all insurance business underwritten on behalf of GLA by Mecon Insurance Pty Ltd ACN 059 310 904 (formerly named Mecon Winsure Insurance Group Pty Ltd) (Mecon);
(d) all insurance business underwritten on behalf of GLA by PEN Underwriting Pty Ltd (PEN);
(e) all insurance business underwritten on behalf of GLA by Solution Underwriting Agency Pty Ltd (Solution);
(f) all insurance business underwritten on behalf of GLA by ATC Insurance Solutions Pty Ltd (ATC) (formerly named Steeve Angew Underwriting Agency Pty Ltd);
(g) all insurance business underwritten on behalf of GLA by Sports Underwriting Australia Pty Ltd (Sports);
(h) all insurance business underwritten on behalf of GLA by Residential Builders Underwriting Agency Pty Ltd (RBUA);
(i) all insurance business underwritten on behalf of GLA by Celestial Underwriting Agency Pty Ltd (Celestial); and
(j) all insurance business underwritten on behalf of GLA by SURA Construction Pty Ltd (SURA) (formerly Latitude Underwriting Pty Limited)[.]
21 The details of the GLA business to be transferred were more fully described in para 18 of Ms De Beus' affidavit, as follows:
(a) Home builders warranty insurance (vested to GLA under the [Calliden] Scheme):
i. Home builders warranty insurance insures the home owner (regardless of whether they are the original homeowner or a subsequent owner during the life of the policy). The home builders warranty insurance portfolios were vested in GLA by way of the [Calliden] Scheme.
ii. [Calliden] had issued policies of home builders warranty insurance for residential building work completed in Victoria, South Australia, and Western Australia from 2005 to 2015.
iii. Residential Builders Underwriting Agency Pty Ltd (RBUA) was authorised by [Calliden] to provide run-off administration services and was authorised by GLA to deal in and provide general advice on general insurance products to wholesale clients.
iv. RBUA manages policies for the Department of Commerce Western Australia (DOCWA) and the South Australian Government Financing Authority (SAFA). The Victorian based policies were underwritten by [Calliden] and did not form part of the RBUA management of warranty.
v. GLA continued to issue policies on behalf of the respective state governments for Western Australia until 1 November 2017 and South Australia until 30 June 2017.
vi. The majority of home builders' warranty insurance policies were issued to registered builders as policyholders, with the remainder issued to owner-builders. The periods of cover under these policies reflect the statutory requirements for home builders warranty insurance in each state, as follows:
1. Six years from the date of completion of building works carried out in Victoria;
2. Five years from the date of completion of building works carried out in South Australia;
3. Six years from the date of completion of the building works for registered builders' home warranty insurance carried out in Western Australia. For owner-builders, the required period of cover in Western Australia is seven years from the date of issue of the building licence for the works to the owner builder.
(b) Personal Lines (vested to GLA under the [Calliden] Scheme): home building and contents, and motor insurance are both personal lines insurance. The transferring personal lines insurance has been in run-off since on or around 2014 or 2015. These policies were vested to GLA under the [Calliden] Scheme.
(c) Motor Lease Guarantee (vested to GLA under the [Calliden] Scheme): motor lease guarantee insurance business is distributed by a provider of novated motor leases, nlc Pty Ltd, where the period of cover reflects the term of the novated lease. [Calliden] issued motor lease guarantee insurance policies between July 2007 and 2015. The nlc Pty Ltd policies were vested to GLA by way of the [Calliden] Scheme. The maximum lease term, and therefore the maximum period of cover available for this insurance, is five years.
(d) Construction Insurance: GLA underwrote specialist construction insurance ranging from small to large construction projects. GLA ceased writing the transferring agency construction insurance:
i. of PEN on 1 December 2016;
ii. of Mecon on 31 May 2016; and
iii. of SURA on 30 April 2017.
(e) Commercial Business Insurance: GLA underwrote commercial insurance for small to medium enterprises (SME) coverage for both property damage and personal liability coverage. GLA ceased writing the transferring commercial business insurance:
i. of Hollard on 31 March 2018;
ii. of Sports on 31 March 2017;
iii. of ATC on 26 February 2010; and
iv. of Celestial on 30 April 2017.
(f) Professional Indemnity: GLA ceased writing professional indemnity insurance of Solution on the 31 March 2017.
22 Ms De Beus was familiar with GLA's information system through her own knowledge and through other employees' enquiries and investigations and she sought thereby to obtain the policyholder contact information for the transferring business of GLA. In substance there were approximately 530 open claims as at 1 May 2020 and approximately 5953 policies that will have unexpired periods of insurance as at 1 May 2020.
23 The affected policyholders who it is proposed to contact are the policyholders concerned with the 530 open claims and the approximately 5953 unexpired policies. That will leave not specifically contacted or sought to be contacted the policyholders under expired insurance in respect of which no claim exists. The policies were largely occurrence based policies. There is therefore some possibility that there will be claimants under expired policies who may come forward in the fullness of time. They may relevantly for present purposes be described as incurred but not reported (at least to the insurer).
24 The evidence of Ms De Beus including the documents provided by her in her affidavit indicated that for a number of the managing general agents, in particular where there were open claims, there were no details of the policyholder in GLA's records. In these cases it is proposed that the policyholders be communicated with through the broker. This would be by way of the broker passing on a letter from Munich Re and GLA. At the dispensation hearing I discussed with Mr Oakes SC who appeared for the applicants that the letter to the broker should be in evidence and should make clear to the broker the importance of the enclosed letter concerning the scheme being provided to the policyholder and if the broker was not prepared to communicate with the policyholder the insurer would do so upon the broker providing the relevant contact details of the policyholder. I am satisfied in all the circumstances that this is an appropriate course. Where there are policyholder details from managing general agents in the records of GLA the communication will be to those persons directly.
25 In relation to all home builders warranty policies there is a complete knowledge of all the premises where the construction took place such that the beneficiary of the policy will be notified as well as the policyholder.
26 In addition to the notification to policyholders either directly or via brokers, further steps are being taken should communications be returned undelivered. Also, in addition to the publication and inspection process under the Act and APRA's insurance determination to which I have referred, GLA proposes to take further steps to promote awareness of the proposed scheme including the creation of pages on its website, notifying relevant government departments, providing a letter to policyholders directly or via a broker enclosing the scheme and providing information about it, dealing with return to sender correspondence, setting up a telephone call system, and advertising in newspapers around Australia.
27 The position of HSB is somewhat more straightforward. Ms O'Reilly identified the relevant affected policyholders as claimants with open claims under policies written by HSB, of which there were two, and policyholders of insurance that was unexpired as at March 2020, which were two policies: one a multi-year construction contract due to expire on 30 March and the other a construction project contract where the policy has expired but it remains in a one year maintenance period expiring in April 2020. For each of these policyholders HSB has relevant knowledge and will communicate with policyholders at their relevant addresses, which HSB has.
28 The policies that are expired and in respect of which no claims have been made are largely occurrence based policies. Thus there could be claims referable to them against policyholders that have not yet been made known to GLA. That may be because the claim has not been made against the policyholder or the policyholder has not yet made a claim on GLA. The nature of the claim and the circumstances of it coming to the attention of GLA will depend on the type of policy involved.
29 GLA ceased writing business in 2018 and 2019. It had been writing general insurance business in Australia since 2007 or 2008. Some 958,200 policies have been written since commencement of writing business.
30 As to future claims and thus (as yet unknown) claims on policyholders the intended notification reflected in the dispensation orders was set out in section 4.1 of the Communications Strategy for the GLA scheme as follows:
Given the nature of the portfolios, the risk of late claims after the periods of cover have ended for each policy is remote. Most policies in the runoff portfolio are occurrence based and so claims are usually made during the policy period or soon thereafter. There is only a small number of claims-made policies and again, most claims will be made during the policy period or arise from circumstances notified during the policy period. Whilst there are some claims received after policy periods have ended, the number is not great relative to the number of policies that have been issued by GLA over time. Given this, GLA has formed the view not to notify the larger group, particularly given that GLA will remain a licenced insurer in Australia, and in the unlikely event a policyholder who was not notified contacts GLA in the future with a claim, they will be directed to Gordian. Further, GLA is of the view that the steps set out below in section 4.2, including national advertising and opportunities for inspection, will ensure that there is broad publication of the Scheme and therefore a high probability of notification to all policyholders not otherwise directly contacted.
31 The steps in section 4.2 are as follows:
GLA will:
(a) publish a notice regarding the Scheme in newspapers circulating in every State and Territory in Australia (the Notice of Intention);
(b) make the Scheme Documents available for inspection at a location in every State and Territory in Australia, or provide a copy of those documents to affected policyholders on request;
(c) notify various government departments which administer or deal with builders' warranty insurance; and
(d) arrange for the Scheme Documents to be published on GLA's website.
32 In relation to HSB, insurance ceased to be written in 2017. It had been writing general insurance business in Australia since about 2008.
33 As to future claims, the intended notification reflected in the dispensation orders was set out in section 3.1 of the Communications Strategy for the HSB scheme as follows:
Given the nature of the portfolios, the risk of late claims after the periods of cover have ended for each policy is remote. All of the policies in the runoff portfolio are first party loss policies and are occurrence based, with the majority being construction all risk. As such, claims are generally made during the policy period or soon thereafter, and the chances of a claim being made after the risk period is small.
HSB's data demonstrates that the vast majority of claims are notified within 12 months the policy expiry date, and within 12 months of the loss event.
Over last 11 years, 96% of claims were notified within the policy period or less than 12 months after the policy expiry. This figure increases to 98% within 24 months and 99% within 36 months, demonstrating that the chance of a claim being made after the policy period is remote, and becomes more so with each passing year.
HSB has been off risk for most business for some time (24-35 months at least). The more recently written business was Ensurance, which has a lower incidence of late notification than our previously written construction project business.
In the unlikely event a policyholder who was not notified contacts their broker in the future with a claim, they will be directed to Gordian.
Further, HSB is of the view that the steps set out below in section 3.2, including national advertising and opportunities for inspection, will ensure that there is broad publication of the Scheme and therefore a high probability of notification to all policyholders not otherwise directly contacted.
34 The steps in section 3.2 were as follows:
HSB will:
(a) publish a notice regarding the Scheme in newspapers circulating in every State and Territory in Australia (the Notice of Intention);
(b) make the Scheme Documents available for inspection at a location in every relevant State and Territory in Australia (noting that there are no Affected Policyholders in the Australian Capital Territory or the Northern Territory) or provide a copy of those documents to Affected Policyholders on request;
(c) arrange for the Scheme Documents to be published on HSB's website.
35 Whilst the proposition underlying sections 4.1 and 3.1 of the two Communication Strategies might be open to some discussion, I am prepared to work on the basis that there is a reasonable basis in insurance practice and experience to found such an approach. Neither Ms De Beus nor Ms O'Reilly appeared, however, to have the necessary expertise to give this evidence, but I infer that it was a considered view within Munich Re that has not attracted the disagreement of APRA. It would, however, have been preferable to have direct evidence of such from someone. Where matters of insurance practice or opinion are relevant to influence the grant, or the scope of the grant of the dispensation under s 17C(5) considered evidence of someone with relevant expertise should be directed to the proposition. I am not intending any disrespect to Ms De Beus or Ms O'Reilly; nor am I intending to doubt the wisdom of the position taken by APRA. For these reasons, notwithstanding my willingness here to make the orders, I requested that an affidavit be filed from someone suitably qualified at Munich Re to support sections 4.2 and 3.1 of the two Communication Strategies. That evidence should be filed before the confirmation hearing.
36 In discussion at the hearing I sought an amendment to Order 2 in each set of orders to provide for the communication with policyholders in respect of claims that come forward after 1 May 2020 up to 31 May 2020 in relation to GLA and after 12 March 2020 up to 31 May 2020 in relation to HSB.
37 Having considered the affidavits of Ms De Beus, Ms O'Reilly, Mr Atkins and Mr Stephan, together with the draft letter to the brokers and the policyholders and the amendments to Order 2 in each set of orders, I am persuaded that the steps to be taken in the orders proposed will appropriately and fairly bring to the attention of affected policyholders the relevant matters to permit them to consider whether they should participate in the confirmation hearing which is presently scheduled for 26 June 2020 and that it is necessary that the full rigour of s 17C(2)(c) be ameliorated by dispensation. In coming to that conclusion I have taken into account a number of matters. First, I am satisfied that the steps taken to notify affected policyholders will bring forward any rational and reasoned opposition that there may be to either scheme. Secondly, the provision of relevant documents to policyholders is extensive and the product of conscientious work and thought. Thirdly, the additional dissemination and steps taken are likely to see publicity for the scheme. Fourthly, there is a certain unpracticality in scouring expired policies for possible unknown claims (at real cost) when the steps taken are comprehensive for contemporaneous risks and likely existing claims, and are likely to throw up any opposition that may be warranted.
38 APRA has considered all aspects of the scheme including the dispensation application and does not oppose the scheme nor the dispensation requested.
39 For these reasons I was prepared to make the orders yesterday in the form attached to these reasons pursuant to s 17C(5) in respect of both matters.
I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop.