In the matter of Reward Insurance Ltd [2004] FCA 151

REASONS FOR JUDGMENT 1 This is an application under s 17F of the Insurance Act 1973 (Cth) (the Act) for the confirmation of a scheme for the transfer by a general insurer, Reward Insurance Ltd (Reward), to another general insurer, Australian International Insurance Ltd (AII), of part of Reward's insurance business, namely, builders' warranty and commercial insurance and home and contents insurance. 2 Part III Div 3A of the Act sets out various formalities as to notification of policyholders and advertisements. I am satisfied that those have been complied with. I record that Finkelstein J gave leave on 17 February 2004 for dispensation with compliance with some of those requirements pursuant to s 17C(5). 3 The discretion conferred on the Court to confirm without modification, confirm subject to modification or refuse to confirm, is a general one. The Act contains no specific criteria which the Court is to apply. Obviously a prime consideration would be the nature of the actual or potential claims to which the transferor insurer is subject and the financial viability of the transferee insurer. There is no evidence before the Court as to these matters. However, the Australian Prudential Regulation Authority (APRA) supports the application and I rely on its assessment. As will be seen, this application has in a sense been initiated by action taken by APRA. 4 The complication which arises in the present case flows from a practice which Reward adopted in relation to its home and contents policies. Apparently Reward marketed those policies on the basis that if an insured continued to insure for five years without making any claims, Reward would grant a policy for the sixth year without charge. 5 It is clear that AII do not intend to offer a free year of householder's insurance to Reward policyholders who would otherwise be entitled. By a circular letter dated 21 January 2004 to home and contents policyholders, Reward advised that it has "resolved to exit the Australian insurance market". The letter advised of the transfer of the home and contents policies to AII, subject to approvals from the Federal Court and APRA. The letter advised that "AII, from the contract completion date ‑ anticipated to be late February 2004 ‑would assume the liability to honour all of your current policy terms and conditions until its expiry date and handle all claims arising under the policy.…Importantly, however, AII will not be renewing your existing insurance policy when it comes due for renewal after its current expiry date." 6 The letter then refers to a "preferred arrangement" with the Hollard Insurance Company Pty Ltd to provide eligible customers with a quote on a new Hollard home and contents policy. The letter states that Hollard "has agreed that the quotes it provides will take into account our customer's long‑standing relationship with Reward, including any claim free years." 7 However, it is clear that Hollard, who is not a party to the present proceeding, has not undertaken unconditionally to honour any free sixth year commitment of Reward. 8 In these circumstances, a Reward policyholder, Mr Ian Burton, who is represented by Mr Lees, argues that the Court should either refuse to approve the scheme or confirm it with conditions that "protect policyholders who are in a similar situation to Mr Burton, such as the provision by Reward of adequate security." 9 When I raised this matter yesterday, I suggested consideration of conditional approval, not in the terms which Mr Lees now seeks but which perhaps would have had the same effect. Today the applicants have tendered affidavits by Mr Gordon Robert Siggins, the Chief Executive Officer of AII, and Mr Douglas Burge, the Managing Director of Reward. 10 According to Mr Siggins' affidavit, the negotiations from a commercial point of view were prompted by APRA's concern as to Reward's solvency. AII were interested in the Reward's builders' warranty and commercial portfolio, but not in its home and contents portfolio. Mr Siggins deposed that "AII had no real interest in acquiring Reward's home and contents insurance policy as it does not write insurance of that nature and had no ambition to become involved in that part of the insurance market." However, pressure was brought to bear to take on Reward's business and to "help Reward out of its difficulties with APRA." This was agreed to. 11 The transfer agreements that were ultimately executed provide for a consideration of $1.5 million for the builders' warranty and commercial insurance portfolio, but nothing for the home and contents portfolio. Mr Burge deposes that there are approximately 1700 Reward home and contents policyholders who have held a policy over four years and not made a claim on the policy. The average annual premium for the policy is approximately $420. The cost, therefore, of comparable policies, assuming a 10 per cent claim in the present year, would be about $643,000, not including additional administrative or consequential costs. 12 The relevant contractual terms are that, in effect, AII agrees to assume the "transfer contracts (excluding the insurance liabilities) arising after the effective date and the insurance liabilities arising before or after the effective date." Insurance liabilities are defined as Reward's premium liabilities and claims liabilities as an insurer under the home and contents portfolio. In other words, policyholders who have claims payable under their Reward policies, either existing or future, will be able to look to AII for satisfaction. However, non-insurance liabilities such as ordinary commercial liabilities for rent, salaries etc, will only be the responsibility of AII if they arise after the effective date. 13 Without a lengthy consideration of the matter, it seems to me probable that such liability as Reward may have for not providing a free sixth year is not an "insurance liability" within the meaning of the agreement. It may be a collateral warranty or it may give rise to some claim under the Trade Practices Act 1974 (Cth), but I do not think it is either a premium liability or a claimed liability against Reward as insurer. 14 Nevertheless, the question remains whether as a matter of discretion I ought to impose some sort of condition in favour of policyholders in the position of Mr Burton. 15 The problem with this arises from the parlous position of Reward. Mr Gotlib on behalf of APRA informed me that the Authority had been concerned with the position of Reward since August last year. An inspector was appointed on 10 October 2003. He found that Reward's liabilities were undervalued to such an extent that it had only something like half the required capital. There was concern for Reward's 50,000 policyholders. If the present scheme is not approved, it is likely that APRA would give a direction to Reward to cease underwriting pursuant to s 62(1)(a) of the Act. Mr Gotlib did not think that any other insurer would be prepared to accept a compulsory transfer. In that event, Reward would, as senior counsel for Reward put it, be "bleeding to death"; it would be in run-off and the position of all policyholders, including those entitled to the sixth free year, would be prejudiced. 16 I think on balance that prospect is sufficiently serious to outweigh the legitimate concerns of Mr Burton and persons in his position. I note, in particular, one of the main objects of the Act, as contained in s 2A(1), is "to protect the interests of policyholders and respected policyholders under insurance policies ... in ways that are consistent with the continued development of the viable, competitive and innovative insurance industry." Anything that would put at risk the rights of policyholders to be paid under their policies obviously would run counter to that. Moreover, if there is some claim against Reward that could be enforced by proceedings under the contract or under the Trade Practices Act in an appropriate court or small claims tribunal. 17 I think therefore on balance I should confirm the scheme pursuant to s 17F(1)(a) without modification. However, I think Mr Burton has raised a valid matter which is important for the Court to consider. It is reasonable that the applicant pay his costs. 17 I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.