HDI-Gerling Australia Insurance Company Pty Limited, in the matter of HDI-Gerling Australia Insurance Company Pty Limited (ABN 16 069 085 196) [2010] FCA 505

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

IN THE MATTER OF HDI-GERLING AUSTRALIA INSURANCE COMPANY PTY LIMITED HDI-GERLING AUSTRALIA INSURANCE COMPANY PTY LIMITED (ABN 16 069 085 196)

BACKGROUND 1 This proceeding is brought pursuant to Division 3A of Part III of the Insurance Act 1973 (Cth) ("the Act") for confirmation of a scheme pursuant to which the insurance and reinsurance business of HDI-Gerling Australia Insurance Company Pty Limited ("the Australian Company") will be transferred to the Australian branch ("the Branch") of HDI-Gerling Industrie Versicherung AG ("the German Company"). 2 Both the Australian Company and the German Company are part of the same group of companies. I have been provided with a corporate chart which shows the group's structure. The ultimate parent company is Haftpflichtverband der Deutschen Industrie Versicherung auf Gegenseitigkeit. 3 Both the Australian Company and the German Company are direct or indirect subsidiaries of the parent, the main company in the group apparently being Talanx AG. Both the Australian Company and the German Company are authorised under the Act to carry on the business of a general insurer in Australia. 4 The Australian Company commenced business as an insurer in Australia in 1995, writing a variety of types of insurance, including both long and short-tail insurance business and reinsurance business. On 31 December 2002 the Australian Company ceased writing insurance and reinsurance business subject to three exceptions which are described in the affidavit of Mr Devlin which was read in support of today's application. The Australian Company ceased writing all insurance and reinsurance on 30 September 2009. 5 The German Company, through the Branch, commenced business as an insurer in Australia on 1 October 2009. It has underwritten engineering risks, clinical trials insurance and local policies referrable to the HDI-Gerling group's international program, to which I will refer shortly. 6 The details of the scheme were not in evidence on today's application, but in general terms the scheme may be described as an intra‑group scheme designed to rationalise the business of the overall HDI-Gerling insurance group in Australia. The object of the scheme is to put all of the Australian operations into one entity. This will of course provide savings and will provide compliance costs savings and other saving of expenses in relation to regulatory matters and in the conduct of the business in Australia. 7 The Branch is of course not a separate legal entity, however the German Company is registered in Australia as a foreign company and its Australian insurance operations are regulated by the Australian Prudential Regulation Authority ("APRA"), the purpose being to seek to ensure that it has sufficient assets in Australia to meet claims that are made in respect of its Australian insurance operations.

LEGISLATIVE FRAMEWORK 8 I have before me today an application by the Australian Company for orders under section 17C(5) of the Act, dispensing with the need for compliance with section 17C(2)(c) of the Act. Section 17C sets out the steps which must be taken before an application for confirmation is made. One of the steps is stated in section 17C(2)(c), namely that an approved summary of the scheme be given to every affected policy holder. 9 Section 17C(5) provides that the Court may dispense with the need for compliance with section 17C(2)(c) in relation to a particular scheme if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that the paragraph be complied with. It is established that on the proper construction of s 17C, the steps referred to in the section need only be taken prior to the time at which the Court is moved for an order for confirmation of the scheme. The steps are not required to be taken before the filing of the application in the Court registry, but at a time before the order for confirmation of the scheme is sought; see Re Armstrong Jones Life Assurance Limited (1997) 74 FCR 160 at 163; see also Re Insurance Australia Ltd (2004) 139 FCR 450 at [30] - [37]. 10 An affected policyholder is a holder of a policy being transferred under the scheme: see Re Insurance Australia Ltd at [19] - [20].

THE NEED FOR DISPENSATION 11 The need for the dispensation order arises, in particular, because of the way in which the Australian Company's business was conducted in Australia. This is described in some detail in the affidavit of Mr Devlin, commencing at paragraph 11. Mr Devlin explains in this paragraph that the Australian Company formerly wrote property and casualty insurance business as well as reinsurance business. He explains that on 31 December 2002 the Australian Company ceased writing all of its insurance and reinsurance business, apart from three classes of business. The first is "International Program" business. This refers to an international program of insurance which is arranged globally by one of the group companies for one of its multinational clients. The second category is insurance agreements entered into prior to 31 December 2002, namely professional indemnity cover for members of the Royal Australian Institute of Architects. The third is business written under an agreement entered into before 31 December 2002, namely personal accident cover written for Accident and Health International Underwriting Pty Limited ("Accident and Health"). 12 The Australian Company ceased writing the International Program business on 30 September 2009. It ceased writing the professional indemnity cover referred to above on 29 June 2004. It ceased writing the personal accident cover mentioned above on 28 February 2003.

THE AUSTRALIAN COMPANY'S BUSINESS 13 In broad terms, the insurance business of the Australian Company in relation to both its International Program business and its non-International Program business, comprised various types of property and liability policies. It is unnecessary to describe the particular categories. 14 These different classes of insurance policies comprised a mix of risks some of which are described as short-tail and others of which are described as long-tail in nature. The long-tail business falls under two subcategories: the first is described as 'claims made policies', the second is 'manifestation policies'. The latter describe liability policies under which a policyholder has an entitlement to indemnity from the Australian Company for loss, injury or damage during the policy period arising from an occurrence whenever occurring. Clearly enough, it is this which differentiates manifestation policies from claims made policies. 15 The Australian Company wrote some its insurance business directly with insureds but the majority of its business was written through insurance intermediaries such as insurance agencies or brokers. Mr Devlin sets out a list of five underwriting agencies through whom business was written. They include SLE Worldwide Australia Pty Limited ("SLE Worldwide"). The Australian Company also had an agency agreement with HIH Casualty and General Insurance Limited for a short period, from 1 December 2000 until 14 March 2001, for various lines of insurance and reinsurance business. 16 The Australian Company underwrote a small number of reinsurance contracts, either directly or through an insurance or reinsurance intermediary. These were of a specialised nature. The exposure of the Australian Company under the relevant insurance treaties expired in 2005 for one class of business and 2003 to 2004 in respect of another class of business. Mr Devlin states that there are no outstanding claims under a treaty known as the Satellite Treaty and that it is very unlikely that a claim could successfully be made under that treaty at the present time.

IDENTIFICATION OF AFFECTED POLICYHOLDERS 17 Mr Devlin sets out the steps which he has taken to try to identify affected policy holders from the Australian Company's records. The Australian Company keeps records of its Australian insurance and reinsurance business on a computer database system hosted in Sydney and called by the acronym GRAILE. 18 That system records policyholders, premiums, claims and accounting information but it does not contain the contact details of policyholders. Mr Devlin ran a review or report on the GRAILE system last year which identified a total of 4047 policyholders affected by the proposed scheme.

AFFECTED POLICYHOLDERS TO WHICH A COPY OF THE APPROVED SCHEME SUMMARY IS PROPOSED TO BE SENT 19 In dealing with today's application it is perhaps better to refer first to the affected policyholders to whom a copy of the approved scheme summary is proposed to be sent. The Australian Company proposes to provide a copy of the approved scheme summary to all affected policyholders who have open claims, regardless of whether the claim is made under a long‑tail or short-tail policy. The Australian Company holds contact details for all affected policyholders with open claims under policies written directly by the Australian Company. 20 The Australian Company also holds contact details for affected policyholders with open claims under policies written through two of its agency arrangements. The identification process has identified a total of eight open claims from those two agencies. 21 The Australian Company does not hold contact details for affected policyholders with open claims under policies written through its agency arrangements with Accident and Health. However, Mr Devlin sent a letter to Accident and Health in April 2010 which produced a reply from Accident and Health identifying two affected policyholders with open claims at that date. 22 The Australian Company holds contact details for affected policyholders with open claims as at and after March 2003 under policies written through its agency arrangements with SLE Worldwide. The steps taken by Mr Devlin satisfy me that SLE Worldwide is unlikely to hold any affected policyholder information other than information which is already held by the Australian Company. 23 I do not consider it necessary to refer to each of the affected policyholders' open claims which are referred to in paragraphs 50 to 57 of Mr Devlin's affidavit. It is sufficient to say that as a result of the inquiries and steps taken by Mr Devlin the Australian Company intends to provide a copy of the approved scheme summary to a total of 65 affected policyholders with open claims including those where the policy was issued directly by the Australian Company and those where the policy was issued through an agency arrangement. 24 The Australian Company also intends to provide a copy of the approved scheme summary to all affected policy holders to which the Australian Company issued an International Program policy after 31 December 2002 regardless of whether the claim is made under a long-tail or short-tail policy. 25 The Australian Company intends, in addition, to provide a copy of the approved scheme summary to all affected policyholders to which the Australian Company issued a policy through its agency agreement with SLE Worldwide. This will be in addition to the steps which Mr Devlin has described in relation to the contact he has made with SLE Worldwide in an endeavour to obtain details of affected policyholders. 26 With regard to manifestation policies, the Australian Company intends to provide a copy of the approved scheme summary to all affected policyholders to which the Australian Company has issued such a policy and where the Australian Company has been able to identify the contact details of the affected policyholder by means of the searches and inquiries which are explained in the affidavit and to which I will refer below. 27 The Australian Company also intends to provide a copy of the approved scheme summary to all affected policyholders to which the Australian Company issued a contract of reinsurance as reinsurer.

AFFECTED POLICYHOLDERS TO WHICH A COPY OF THE APPROVED SCHEME SUMMARY IS NOT PROPOSED TO BE SENT 28 The steps which have been taken to identify affected policyholders are described in Mr Devlin's affidavit at paragraphs 28 and following. I do not think I need to describe them in any more detail in my reasons, however it is necessary to then turn to the question of affected policyholders to whom a copy of the approved scheme summary is not proposed to be sent. These fall into two separate categories. 29 The first may be described as policyholders who are very unlikely to make future claims. Mr Devlin explains at paragraph 40 of his affidavit that based on his knowledge and experience the Australian Company is unlikely to receive new claims by affected policyholders insured by the Australian Company under short-tail policies or by affected policyholders insured under long-tail policies that have been written on a "claims made" basis. Mr Devin illustrates this by reference to the claims last notified on policies other than International Program policies. The last claim was made on a professional indemnity policy on 9 February 2009 and, as Mr Owens who appeared for the applicant on today's application submitted, it is most unlikely that professional indemnity policies would be written on a manifestation basis. 30 As a result of the portfolio business review reports conducted by Mr Devlin, a total of 3048 insurance policies were identified. There may be less than 3048 policyholders because some affected policyholders hold one or more policies in each category. Nevertheless the general effect of this process of identification indicates that there will be approximately 1000 policies in respect of which there will be notification. This is explained by the fact that Mr Devlin identified a total of 4047 affected policyholders and there are 3048 policies in respect of which an approved scheme summary is not proposed to be sent. 31 The second category of policyholders for which it is not proposed to send a copy of the approved scheme summary are policyholders in respect of which contact details are not reasonably available. Mr Devlin describes in paragraph 46 of his affidavit the steps which he took, or caused to be taken, to try to obtain contact details for affected policyholders in respect of whom the Australian Company does not hold records of contact details. The steps include physical searches made at the Australian Company's offices, online searches using the White Pages website maintained by Telstra Corporation Limited, Australian Securities and Investments Commission ("ASIC") searches, searches of insurance industry publications and a number of other methods set out at paragraph 46 of the affidavit. 32 After completing these searches, Mr Devlin identified 16 policyholders with no identifiable contact address, or which had been deregistered, or in respect of which there are insufficient details to be able to identify them. Mr Devlin states that having taken all reasonable steps to identify the contact details of affected policyholders, the Australian Company cannot notify these 16 policyholders of the scheme. 33 There is one additional category of affected policyholders for which there is no identifiable contact address. These appear to be policies issued through insurance brokers where the policyholder has been deregistered or has otherwise ceased to exist. Out of an abundance of caution the Australian Company proposes to provide a copy of the approved scheme summary to all of the insurance brokers that have been identified, as well as five insurance agents identified in connection with these policyholders.

ADDITIONAL NOTIFICATION 34 There are a number of additional steps which have been taken to try to identify affected policyholders for the purpose of notifying them of the scheme. They include the five insurance agents in respect of the agency agreements to which I have referred above. Mr Devlin has created spreadsheets for insurance brokers and reinsurance brokers for which contact details are held. Also, for the purposes of providing a copy of the approved scheme summary to each reinsurer authorised under the Act that has issued a contract or treaty of reinsurance to the Australian Company, Mr Devlin has created a spreadsheet containing details of those reinsurers. Although the reinsurers are not affected policyholders, the Australian Company intends to provide a copy of the approved scheme summary to those who are listed on Mr Devlin's spreadsheet. 35 There are also other steps that will be taken. It is proposed to provide a copy of the approved scheme summary to all authorised insurers under the Act who are authorised to carry on new or renewal insurance business, or who are authorised to conduct run-off business. 36 Provision is made in the Prudential Standards issued under the Act for publication of a notice concerning the proposed scheme in the Australian Gazette and in other publications. A form of notice has been prepared and advertisements will be published in the approved form in The Australian newspaper. 37 Additionally, notice of the scheme will be given on the HDI-Gerling Group website and a copy of the approved scheme summary will be made available on the Internet.

DISCUSSION 38 The Court has said on a number of occasions that a dispensation order under section 17C(5) or its analogue in the Life Insurance Act 1995 (Cth) is a matter of considerable importance and should not be regarded as a matter of course. As Sackville J said in The Application of Commonwealth Life Ltd [2003] FCA 501 at [8]: A right to be heard in relation to a proposed scheme may be of little value if a person does not know of the proposal. 39 It has been said on a number of occasions that the Court is not a rubber stamp for such applications. The authorities are collected and referred to by Lindgren J in Re Westport Insurance Corporation [2009] FCA 1357 ("Re Westport") at [38] - [39]. 40 The discretion that is granted under section 17C(5) is a general one. The section does not specify any criteria for the Court to apply in determining whether the nature of the scheme or the circumstances of its preparation warrant the making of an order. However, there is considerable guidance in the authorities in particular in Re Westport at [41] - [48]. 41 It seems to me that in the present case it is appropriate for me to exercise my discretion under section 17C(5) for a number of reasons. These are set out in the written outline of submissions provided to me by counsel for the applicant. 42 First, a full search of the Australian Company's records has been undertaken. The Australian Company has done, it seems to me, all that is within its power to do in order to identify affected policyholders likely to have an interest in the scheme. The diligence of the search is a relevant consideration in determining whether to grant a dispensation: Re Calliden Group Ltd [2007] FCA 2019 ("Re Calliden") at [62]. 43 Second, the additional steps that have been taken by the Australian Company give the Court some comfort that affected policyholders who are not directly notified may receive notice of the scheme. In this regard the observations of Emmett J in Re GIO Personal Investment Services Ltd [2000] FCA 1871 at [16] - [18] are relevant. 44 The fact that additional steps will be taken to draw the scheme to the attention of affected policyholders has been held to favour the granting of a dispensation order under section 17C(5): see for example Re Westport at [44] - [46]. 45 Third, APRA appeared on today's application. APRA's solicitor informed me that APRA is content with the action that is proposed to be taken to notify policyholders and that APRA has no objection to the application. 46 Fourth, although I have not been provided with a copy of the approved scheme summary because no approval has yet been granted, this is not a barrier to the making of a dispensation order. In Munich Reinsurance Company of Australasia Ltd [2004] FCA 1391 ("Munich Reinsurance Company") at [5], Tamberlin J observed that APRA had yet to consider the terms of the scheme or to grant an approval. Nevertheless, his Honour granted a dispensation order. It is implicit in what his Honour said in Munich Reinsurance Company at [5], and it has also been said plainly in other cases, that the making of a dispensation order does not mean that the scheme will be confirmed at the final hearing. The question of whether the scheme will be confirmed is a matter for me at the confirmation hearing. In the event that the scheme summary is not an accurate one then it would of course be open to me to refuse to confirm the scheme at that hearing. 47 The fifth matter which is relevant is that the scheme is an intra-group scheme: see Re Calliden at [62]. However in this case, the fact that the Australian Company and the German Company are both part of an international group is a matter which suggests that the intra-group consideration is not as important as the others to which I have referred. 48 For the reasons mentioned above I propose to make orders in terms of the draft orders provided to me by Mr Owens. I will therefore make orders in terms of the short minutes of order which I will sign and date and leave with the papers. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.