Great Lakes Reinsurance (UK) SE, in the matter of Division 3A of Part III of... [2016] FCA 1564 | Case summary

Federal Court of Australia|2016-12-14|Before: Yates J

In relation to the proposed scheme for the transfer of the insurance business of Calliden Insurance Limited (CIL) to the applicant, being Annexure "A" to the originating application (the Scheme), the need for the applicant to comply with s 17C(2)(c) of the Insurance Act 1973 (Cth) (the Act), pursuant to s 17C(5) of the Act, be dispensed with provided that the applicant complies with Orders 2 to 6, below, at least one day prior to the first date of the public inspection period required by the Australian Prudential Regulation Authority (APRA) Prudential Standard GPS 410.
The applicant send a summary substantially in the form of Exhibit A, which has been approved by APRA in respect of the Scheme (the Scheme Summary), and in the letter sending the Scheme Summary inform the recipient of the availability of the Scheme Summary on the websites referred to in Order 4 below, by either pre-paid post to the postal address on CIL's files or by email to the email address held on the files of CIL, the applicant and/or nlc Pty Ltd: (a) to every affected policyholder and the registered property owner in respect of: (i) registered builder's home warranty insurance policies issued by CIL; and (ii) owner-builder's home warranty insurance policies issued by CIL from 1 November 2009, for which the applicant has an address, that have been identified from records and publicly available sources, as described in the affidavits of Philip Craig Daley of 6 December 2016 and 13 December 2016; (b) to every affected policyholder in respect of motor lease guarantee insurance policies issued by CIL, for which the applicant has an address, that have been identified from records and publicly available sources, as described in the affidavits of Philip Craig Daley of 6 December 2016 and 13 December 2016; (c) to every affected policyholder in respect of claims under policies of insurance issued by CIL that are open as at 31 December 2016 for which the applicant has an address, that have been identified from records and publicly available sources, as described in the affidavits of Philip Craig Daley of 6 December 2016 and 13 December 2016;

Introduction 1 The applicant, Great Lakes Reinsurance (UK) SE, which trades as Great Lakes Australia (GLA), proposes to acquire the insurance business of Calliden Insurance Limited (Calliden) pursuant to a scheme under Div 3A of Pt III of the Insurance Act 1973 (Cth) (the Act). 2 The present application is brought under s 17C(5) of the Act to dispense with the requirements of s 17C(2)(c) to give every affected policyholder a copy of the approved scheme summary. Conditional dispensation is sought. 3 The Australian Prudential Regulation Authority (APRA) has appeared at the hearing of the application and has raised no objection to the course that is proposed by GLA for notifying policyholders.

Generally 4 Calliden is a wholly-owned subsidiary of Munich Holdings of Australasia Pty Limited (MHA). MHA is a member of the Munich Re group of companies (Munich Re group). GLA is also a member of the Munich Re group. Therefore, the proposed acquisition involves an intra-group transfer. 5 Both Calliden and GLA are authorised by APRA as general insurers in Australia. 6 Calliden's general insurance business covers a range of specialist lines in the small and medium enterprise and middle market sectors, covering home warranty insurance; farm insurance; financial lines and general liability insurance; business interruption insurance; security, events and entertainment insurance; motor lease guarantee insurance; prestige motor vehicle and motor bike insurance; and sporting club and association insurance. 7 GLA's proposed acquisition of Calliden's general insurance business is intended to achieve operational efficiency, with attendant capital and costs savings. In preparation for the transfer, Calliden has transitioned the underwriting of its insurance business to other insurers, including GLA, as policies have come up for renewal in 2015. By 31 December 2015, Calliden had ceased writing new business. 8 The proposal will see Calliden transfer to GLA: all open claims made under the insurance policies referred to at [6]; and Calliden's run-off insurance portfolio, comprising policies of home warranty insurance and policies of motor lease guarantee insurance. 9 It is necessary to say something more about Calliden's run-off insurance portfolio.

Run-off home warranty insurance 10 This insurance was written for residential building work in New South Wales, Victoria, South Australia and Western Australia. These policies were issued from 2005 until Calliden ceased writing this business in New South Wales on 30 June 2010 and in Victoria, South Australia and Western Australia in 2015. Policies were issued, mostly, to registered builders. However, policies were also issued to owner-builders. 11 When a policy of home warranty insurance was issued, the underwriting agent or broker provided Calliden with policy information, including the name and address of the registered builder or owner-builder, and the address of the project. Calliden entered this information into its business system called Sirius, which provides data directly into Calliden's general ledger. From about 2010, policy information was entered by the underwriting agent or broker into an intermediate system called CIS (Construction Insurance System), which automatically interfaces with Sirius. The policyholder paid the premium at the time of purchase and the underwriting agent or broker provided the policyholder with a certificate of insurance. 12 In the case of policies issued to registered builders, Calliden has sought to identify the name and address of every policyholder, and the address of the project, for all policies issued from 1 November 2006 to date. This period comprises the entire period in which Calliden issued registered builders' home warranty insurance. 13 In the case of policies issued to owner-builders, Calliden has sought to identify the name and address of every policyholder, and the address of the project, for all policies issued after 1 November 2009. The reason for only considering policies issued after 1 November 2009 is that this accommodates the longest statutory period for home warranty insurance required amongst the States in which this insurance was written, namely seven years from the date of issue of the building licence for the works, which was the requirement under Western Australian law. 14 In this connection, Calliden has carried out an analysis which shows that approximately 97.7% of all claims made under policies issued by it to owner-builders are notified within the first seven years. This appears to be due to the fact that owner-builders are only required to take out home warranty insurance if the project property is sold within the required period of cover, which typically reduces the period of time in which claims are made following the commencement of cover. 15 Where there is a project address for policies issued to registered builders and owner-builders, the applicant has treated the beneficiaries of these policies as "affected policyholders" for the purposes of s 17C(2)(c) of the Act.

Run-off motor lease guarantee insurance 16 Calliden's motor lease guarantee insurance business was distributed by a provider of novated motor vehicle leases, nlc Pty Ltd (nlc). The period of cover matched the term of the novated lease. The maximum lease term, and therefore the maximum period of cover available, was five years. Calliden issued motor lease guarantee insurance policies between July 2007 and 2015. 17 When a policy of motor lease guarantee insurance was issued by Calliden, nlc's underwriting agent, Vehicle Insurance Underwriters Pty Ltd, recorded policy information, including the name and contact details of the policyholder, in its own business system. This information was then provided to Calliden in a spreadsheet bordereau. This information was entered into Sirius. Calliden retains copies of the spreadsheets and has a list of all issued policies current as at 1 November 2016.

Affected policyholders 18 In respect of all policies that have issued, Calliden's inquiries reveal that, as at 1 November 2016, it had approximately 1,250 open claims. Calliden has contact information for each claimant. 19 With respect to Calliden's run-off portfolio, its inquiries reveal that there were 1,957 motor lease guarantee insurance policies current as at 1 November 2016. Calliden has access to the contact information for each policyholder. 20 The position is somewhat different in respect of its run-off portfolio of home warranty insurance. Calliden has contact postal addresses for 99.69% of registered builder and owner-builder policyholders. As I have noted, beneficiaries of home warranty insurance policies who are not policyholders have been included in the assessment of those persons who are to be treated as "affected policyholders" for the purpose of s 17C(2)(c) of the Act. Calliden has postal addresses for 93.29% of the projects covering these beneficiaries.

Proposed notification 21 GLA has proposed a notification program that dispenses with the requirement of s 17C(2)(c) and instead provides for the approved summary to be given to all affected policyholders who have open claims as at 31 December 2016 and, in the case of its run-off insurance portfolio to be transferred (home warranty insurance and motor lease guarantee insurance) to: all policyholders of motor lease guarantee insurance policies current as at 1 November 2016; all registered builders who are policyholders, and the registered property owners associated with the relevant project (ie, the beneficiaries), where Calliden has, respectively, postal addresses for the registered builder and postal addresses for the relevant projects; and all owner-builders who are policyholders, and the registered property owners associated with the relevant project, where the policy was issued after 1 November 2009 and where Calliden has, respectively, postal addresses for the owner-builders and a postal address for the relevant projects. 22 It is also proposed that the approved summary will be given by email, instead of by post, to the above affected policyholders who have nominated an email address for communications in respect of the policies held. There are a relative small number of such policyholders but, even so, it is thought that communication by this means will achieve efficiencies of administration and will reduce the cost of the notification program. 23 These steps will be in addition to (a) the advertising program approved by APRA, which is to be carried out by placing advertisements in the Government Gazette and designated newspapers circulating in each State and Territory, and (b) the public inspection program approved by APRA. Further, Calliden and GLA will maintain pages on their websites to assist policyholders to direct claims and policy inquiries to GLA. 24 To further promote community awareness of the proposed scheme, if it is confirmed, it is proposed that notification will be given to: the current State builders' warranty insurers in New South Wales and Victoria; the State reinsurer of builders' warranty insurance in South Australia; the relevant State ministry in Western Australia which approves private insurers to provide builders' warranty insurance; and the Offices of Fair Trading in each State and Territory.

Consideration 25 The granting of dispensation pursuant to s 17C(5) is an important matter. Dispensation should not be given as a matter of course: Munich Reinsurance Company of Australasia Limited [2004] FCA 1391 at [4]. As Sackville J remarked in The Application of Commonwealth Life Ltd & Anor [2003] FCA 501 at [8], when dealing with s 191(2)(c) of the Life Insurance Act 1995 (Cth), which is in the same terms as s 17C(2)(c) of the Act, the policy objective is to give every affected policyholder a summary of the scheme and, thus, an opportunity to make submissions on the application to confirm the scheme. 26 As s 17C(5) makes clear, dispensation may be granted in cases where the Court is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary for s 17C(2)(c) to be strictly complied with. 27 On the evidence before me, I am satisfied that it is appropriate to grant the conditional dispensation that is sought. I am satisfied that the notification procedures envisaged will elicit any potential, reasonably-based objection to the scheme that is proposed. In this connection, it is to be borne in mind that the transfer is one that will be internal to companies in the Munich Re group. The scheme will not result in any changes to policy terms and the claims management process will continue to be conducted by GLA, as it has been in the past. An actuarial report in relation to the proposed scheme will be provided by Warrick Gard of Ernst & Young. Mr Gard's draft report, which is in evidence, expresses the conclusion that the proposed transfer will not have any materially adverse impact on either Calliden's or GLA's policyholders. Importantly, as I have noted, APRA has been notified of the conditional dispensation that is sought and, at the hearing of the application, appeared and raised no objection to the proposal. 28 I have referred to the intention to send, by email, the approved summary of the scheme to those policyholders who have notified an email address for the receipt of communications. I can see no reason why this means of giving the approved summary cannot be utilised, as it has been in other, similar cases: Application of Medical Insurance Australia Pty Limited under the Insurance Act 1973 (Cth) [2014] FCA 1015 at [37]-[38]; AAI Limited, application under the Insurance Act 1973 (Cth) [2015] FCA 452 at [27], notwithstanding the terms of s 121 of the Act. The conditions, if any, to be imposed where dispensation is sought are within the discretion of the Court under s 17C(5) of the Act. This would include the mode of giving alternative notice. As in previous cases, my expectation is that, at the confirmation hearing, comprehensive evidence will be given so as to reveal, in a meaningful way, the integrity of the notification process that is proposed, including notification by email. In this connection, I note that the proposal provides for postal notification in cases where an email notification has resulted in a "bounce back".

Disposition 29 For these reasons, the conditional dispensation that is sought should be granted and orders, substantially as sought, should be made. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

Great Lakes Reinsurance (UK) SE, in the matter of Division 3A of Part III of the Insurance Act 1973 (Cth) [2016] FCA 1564

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