FM Insurance Company Limited, in the matter of FM Insurance Company Limited [2021] FCA 1442

Federal Court of Australia|2021-11-12|Before: McKerracher J

The need for the applicant to comply with s 17C(2)(c) of the Insurance Act 1973 (Cth) be dispensed with provided that the applicant complies with Orders 2 to 6 below.
The applicant, provide a copy of a summary approved by the Australian Prudential Regulatory Authority (APRA) in respect of the Scheme (the Scheme Summary) by either pre-paid post to the postal address, or by email to the email address, held on the files of the applicant to the persons listed in Annexure A to these Orders.
The applicant, publish the notice of intention to make the application to the Court for confirmation of the Scheme (the Notice of Intention) as approved by APRA, and as required under APRA Prudential Standard GPS 410 Transfer and Amalgamation of Insurance Business for General Insurers as modified by Insurance (prudential standard) determination No. A1 of 2021 dated 2 November 2021 in the following publications and newspapers: (a) the Government Gazette; (b) The Australian, which circulates in every State and Territory in Australia; and (c) the following metropolitan newspapers: (i) The Sydney Morning Herald; (ii) The Age; (iii) The Canberra Times; (iv) The Mercury; (v) The Advertiser; (vi) The Northern Territory News; (vii) The West Australian; and (viii) Courier Mail.
The applicant provide links to a copy of the: (a) Notice of Intention; (b) Scheme; (c) Scheme Summary; and (d) Scheme actuarial report of Mr Daniel Smith of Taylor Fry (together the Scheme Documents), to be placed on its website www.fmglobal.com.au, such links to be available to the public until a decision on the Scheme is made by the Court or the application is withdrawn.

Introduction 1 The applicant, FM Insurance Company Limited (ARBN 007 502 829), seeks orders under s 17C(5) of the Insurance Act 1973 (Cth) for dispensation from the need for compliance with s 17C(2)(c) of the Act. The dispensation is sought in relation to a proposed scheme for the transfer of all of the insurance business of FM Insurance to Factory Mutual Insurance Company (ARBN 163 108 861) (FMIC) (Scheme). The application is supported by an affidavit of Mr Jonathon Ellis sworn on 28 October 2021 and an affidavit of Ms Lynette Schultheis sworn on 10 November 2021.

Statutory scheme 2 The apparent legislative purpose in the need to obtain approval from the Court in this instance, and also in the case of other activities such as schemes of arrangement, is to provide an additional layer of protection for individuals who could potentially be affected by such schemes and who may not have the knowledge, capacity or willingness to oppose them. The necessary involvement of the regulator and the Court is designed to ensure that those who are not directly involved in the critical decision-making leading to the proposed commercial arrangement are nonetheless no worse off as a result of the arrangement. To the extent it is possible, their interests are that should be protected by the need to obtain approval from the Court. 3 Division 3A of Pt III of the Act deals with the transfer and amalgamation of an insurance business. In particular, s 17B provides that no part of the insurance business of a general insurer may be transferred to another general insurer except under a scheme confirmed by the Court. 4 Section 17C(5) additionally enables the Court to dispense with the need for compliance with s 17C(2)(c) in relation to a particular scheme if the Court is satisfied that, due to the nature of the scheme or the circumstances pertaining to its preparation, it is not necessary for the requirements under s 17C(2)(c) to be complied with. 5 A review of recent authorities on this point will reflect an emphasis that the granting of a dispensation order is a matter of considerable importance and should not be regarded as a matter of course. The authorities also reflect a plain intention that every affected policyholder should be given a summary of the scheme and an opportunity to make submissions to the Court in respect of the scheme at a confirmation hearing: Re Zurich Australian Insurance Ltd [2018] FCA 1567 per Yates J (at [38]); and Re ACE Insurance Ltd [2016] FCA 997 per Gleeson J (at [29]). 6 In this regard, the Court has been prepared to grant dispensation orders where it has been satisfied that the proposed process of notifying the affected policyholders is likely to result in notification of a very large number of affected policyholders, which is sufficient to bring forth, in all likelihood, any objection to the scheme that is based on viable grounds: Re Sunderland Marine Insurance Company Ltd [2018] FCA 565 per Lee J (at [13]); and ACE (at [42]).

The proposed transfer 7 The evidence reveals the matters as outlined in the following paragraphs. 8 FM Insurance is a foreign company registered in Australia and is authorised by the Australian Prudential Regulation Authority (APRA) under the Act to carry on insurance business in Australia. Since 30 September 2014, FM Insurance has only been authorised by APRA to conduct run-off insurance business in Australia. FM Insurance is the Australian branch of the UK-based FM Insurance Company Limited, and is a wholly owned subsidiary within the FMIC (US) global parent group. 9 FM Insurance's business consists of a portfolio of all risk property insurance contracts underwritten by FM Insurance in Australia between 8 September 1972 and 30 September 2014 (Business). The Business has been in run-off since 30 September 2014, with the final insurance policy issued by FM Insurance on 30 September 2014. The Scheme has been proposed for the transfer of FM Insurance's Business to FMIC as part of an internal reorganisation of the FMIC (US) group, with a view to revoking FM Insurance's run-off authorisation upon completion of the transfer of the Business. 10 There are no transferring reinsurances in relation to the transfer of the insurance business of FM Insurance to FMIC. 11 FMIC is a specialist insurer providing its policyholders, who consist solely of commercial organisations, with coverage for property damage (including cyber risk) and resulting business interruption exposures.

Policyholder information 12 FM Insurance's policyholder information is stored on two databases, which are the International Insurance Application (IIA) and the OnBase claims file repository. The policy and policyholder information stored on the IIA are a result of manual input by FM Insurance's processing team, which takes place after the policy information is agreed to and verified by the policyholder. The IIA database has been in use by FM Insurance since 1985. The OnBase database on the other hand is FM insurance's internal repository for claims files, which include policyholder communications, loss notifications and settlement letters. 13 As part of its due diligence process to identify affected policyholders, Ms Schultheis of FM Insurance, caused the following reports to be generated from the IIA system: (a) a report of all policies in force as at 1 October 2014, including expiry dates for those policies; (b) a report to reflect the number of 'open claims' with FM Insurance; and (c) a report to reflect the average period of time between the date of loss and the date a claim was reported to FM Insurance. This report showed that the average time from loss to notification was 44 days. Further, this report shows that approximately 95% of claims were received between 0-199 days from the date of loss and the remaining 5% were received 200 or more days after the loss. FM Insurance has not received any new claims in over 250 days.

Open claim-policyholder 14 Based on a review of these reports, FM Insurance determined that there was only one current claim which remained 'open' in so far as the policyholder is concerned, as 640 out of 641 of FM Insurance's policies had been fully run-off. This was also due to the fact that from FM Insurance's run-off on 30 September 2014, FM Insurance had been managing claims that were received from policyholders. This open claim is reflected in the affected policyholder register compiled by FM Insurance, reflecting a single open claim on FM Insurance's systems which had yet to be settled with the policyholder and closed. 15 This single open claim involves additional complexities that have prevented FM Insurance from closing it, as it is an unique account in which FM Insurance acted as a reinsurer to a large insurance pool with a substantial deductible. For this claim, it is only once all claims made by the policyholder insured under the pool have been paid and all recoveries have been concluded, that the administrators of the pool, Jardine Lloyd Thompson would approach FM Insurance to make a claim under the policy. FM Insurance will ensure that this single affected policyholder will receive the approved Scheme Summary document (as defined in the orders accompanying these reasons).

Settled claim - not closed in FM insurance's system 16 FM Insurance has one other claim that it has settled with the policyholder but it remains open in FM Insurance's system. In so far as the policyholder is concerned, this matter is resolved. The matter remains open in FM Insurance's system only because of matters between it and other insurers.

APRA Individual Prudential Standard 17 APRA has issued Insurance (prudential standard) determination No. A1 of 2021 on 2 November 2021 (Individual Prudential Standard) that applies to this Scheme (in addition to others). The Individual Prudential Standard alters the public inspection requirement in Prudential Standard GPS 410 Transfers and Amalgamation of Insurance Business for General Insurers during the COVID-19 pandemic. FM Insurance has addressed the modified requirements of the Individual Prudential Standard in the relevant Scheme documents and in its proposed orders including to provide for: (a) the inspection of the Scheme documents at FM Insurance's website (www.fmglobal.com.au), as specified by FM Insurance in the Notice of Intention and Transfer Scheme Summary. Ms Schultheis additionally confirms that FM Insurance will make the Scheme documents available for download from FM Insurance's website; and (b) The inspection of the Scheme documents through a dedicated phone number (which can be called to request a copy of the Scheme documents), as specified by FM Insurance in the Notice of Intention and Transfer Scheme Summary.

Dispensation 18 FM Insurance contends that dispensation from the need to comply with s 17C(2)(c) of the Act is required in the present case due to the following: (a) without the dispensation sought, FM Insurance will be required to identify and notify every policyholder from when FM Insurance began writing insurance policies in 1978, which it estimates to be 1200 policyholders. This onerous burden is compounded by the fact that FM Insurance only began implementing an electronic information processing method for its policies from 1985; (b) FM Insurance would need to undertake a manual task of manipulating a report from its product delivery system (BMS) listing each policy written and the broker assigned to that policy (as far as the electronic records go back) to be grouped by Account/Insured Name for the FM proVision Policies which used a different policy delivery system; (c) FM Insurance would need to obtain correspondence information from the mailing instructions in FMIC's Global Business Systems (GBS), which is FMIC's policy delivery system that has been in place since approximately late 2015, as this information is not stored in the IIA. This process would involve manually manipulating the report from the IIA listing each policy written under FM Insurance to be grouped by Account/Insured Name and then for a cross-check to be done for each name against FMIC records in the GBS to find an address; and (d) as the GBS did not exist when FM Insurance was operational, and a separate (and now inactive) policy delivery system was utilised, FM Insurance would need to manually manipulate the report from the IIA listing each policy that was written under FM Insurance in relation to policyholders who did not transfer or renew their policies with FMIC, and review each policy contract in order to obtain and verify correspondence information for this group of policyholders. Ms Schultheis estimates notifying 1200 policyholders would take up to 37 business days to verify information for these policyholders. 19 FM Insurance accordingly submits that dispensation from the requirements of s 17C(2)(c) of the Act is appropriate for the following reasons: (a) first, FM Insurance has been able to obtain the complete address details for the single affected policyholder with an open claim. The Approved Summary will be sent to the affected policyholder via email and pre-paid post. Orders enabling notification by email or pre-paid post are now routinely made: Re AAI Ltd [2015] FCA 452 per Yates J (at [27]); and Re Atradius Credit Insurance NV [2016] FCA 1107; and ACE; (b) secondly, FM Insurance will undertake additional advertising and notification steps in order to increase the likelihood of the proposed Scheme coming to the attention of affected policyholders. This will include: (i) providing a copy of the proposed scheme, the approved Scheme Summary, the Actuarial Report and the Notice of Intention required by APRA Prudential Standard GPS 410 as modified by the Individual Prudential Standard (Approved Notice) accessible on the common website operated by FM Insurance and FMIC; (ii) placing the Approved Notice in eight metropolitan newspapers around the country as well as in The Australian which circulates nationally; and (iii) providing a copy of the Scheme, upon request, to any affected policyholder, at no cost to the policyholder. (c) In Re Application of Gordian RunOff Ltd [2013] FCA 983, Yates J noted (at [19]) that additional steps of this kind taken to draw the scheme to the attention of affected policyholders favour the granting of a dispensation order under s 17C(5): see also ACE (at [32]); (d) thirdly, the Actuarial Report of Mr Daniel Smith from Taylor Fry indicates that implementation of the Scheme will not have a materially adverse impact on the interests of policy holders as: (i) Mr Smith was of the view that FMIC is in a strong financial position, with its current and projected solvency capital position greater than its target; (ii) additionally, Mr Smith was of the view that when considering the relative sizes of the balance sheets, including FM Insurance's liability in FMIC's balance sheet is unlikely to be significant; and (iii) Mr Smith concluded that there is no reason to believe that the transfer will have materially adverse effects on FMIC's policyholders from a financial perspective. (e) such opinions provide comfort that there is a diminished likelihood that substantial objection would be made to the scheme at a confirmation hearing; (f) fourthly, it is unlikely that FM Insurance will receive further claims from policyholders, for the following reasons: (i) The all-risk property insurance contracts that FM Insurance had underwritten were occurrence-based policies which covered losses occurring during the policy period. Importantly, these policies were usually annual policies, and in some circumstances, issued for a two-year period; (ii) FM Insurance's IIA report reflects that approximately 95% of claims were received by FM Insurance between 0-199 days from the date of loss and the remaining 5% were received 200 or more days after the loss. (g) fifthly, and importantly, the transfer to be effected by the Scheme is one internal to the FMIC group. Accordingly, policyholders are not faced with a complete change of identity, in a group sense, of who the insurer is. This was a factor referred to in both Re QBE Insurance (Australia) Ltd [2015] FCA 1223 per Allsop CJ (at [26]) and AAI (at [25]). For practical purposes, because claims processes and handling remain the same, a policyholder will not experience any difference in how their claim is treated or assessed. Contact details will remain the same including the website and claims teams processing any claims; and (h) sixthly, APRA has been notified of the dispensation that FM Insurance is seeking and has conferred with FM Insurance in relation to the relevant Scheme documents. APRA appeared at the hearing of this application to confirm it does not oppose the Scheme, noting that the Scheme documents were amended in consultation with APRA and it does not consider policyholders will be affected by the intra-group transfer. As a result, the Court can take additional comfort that the dispensation sought in the present case is appropriate. This consideration has also been adverted to in previous cases: for example, in QBE (at [27]); ACE (at [34]); and Re Insurance Australia Ltd [2016] FCA 1387 per Gleeson J (at [8] and [43]).

Conclusion 20 For these reasons, I was satisfied that the orders sought by FM Insurance should be granted. 21 Orders in the terms sought by FM Insurance were made at the conclusion of the hearing on 12 November 2021. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McKerracher.

Insurance Act 1973(Cth)ss 17B, 17C(2)(c), 17C(5)

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