Insurance Australia Limited, in the application of Insurance Australia Limited [2016] FCA 1387

Federal Court of Australia|2016-10-17|Before: Gleeson J

Background facts 9 Each of IAL and the transferring insurers is an Australian corporation authorised to carry on a general insurance business in Australia under s 12 of the Act. 10 Each of them is also a wholly owned subsidiary of Insurance Australia Group Limited ("IAG"). 11 IAG and its related bodies corporate are referred to as the "IAG Group". The insurance business carried on by the IAG Group in Australia comprises: (1) Personal insurance ("PI"), which consists of: (a) the Australian consumer division, providing a wide range of motor, home and other personal insurance products for consumers; and (b) the Challenger division, predominately providing home, motor, landlord, holiday and rental cover and travel under the Coles, SGIO and SGIC brands; and (2) Commercial insurance ("CI"), which covers a wide range of business insurance products for small, medium and large businesses. Commercial insurance includes property, liability, commercial motor, marine, professional and financial risks, construction and engineering, crop and workers compensation insurance. 12 IAL, operating under brands including NRMA, SGIO and SGIC, is one of the largest general insurance companies in Australia.

Business to be transferred under the proposed schemes 13 IAL's written submissions contained the following table, summarising the current and non-current types of insurance products issued within the insurance business of the transferring insurers: Transferring Insurer Current and non-current types of insurance product(s) Major brand(s) Distribution method(s) CGU Current CGU Direct PI and CI Intermediary Non-current Workers compensation and home warranty insurance are no longer issued. Claims relating to these historical policies are still being managed WFI Current Coles Insurance Lumley runoff; LSV and Retail Warranty ("other brands") Coles Insurance: PI WFI Direct CI (including workers compensation) Lumley runoff and other brands: Direct and intermediary WFI: Direct and intermediary Swann Current Swann Insurance Direct PI Intermediary HBF Non-current HBF Not applicable PI MCGI Non-current MCGI Not applicable PI CGU-VACC Non-current VACC Not applicable Prior to 2002, CGU-VACC offered: PI (including compulsory third party) CI (including workers compensation) IAG Re Current Not applicable Not applicable Reinsurance of risks of subsidiary companies of IAG Group Non-current Prior to 2007, IAG Re was NZI Insurance Australia Limited and offered: CI Workers compensation

14 The insurance products offered by the transferring insurers include products: (1) provided through joint ventures and underwriting agencies; (2) provided as white label products to partners, which can be sole partner branded or co-branded with the partner; and (3) that have long tail exposure. The key categories of long tail claims currently managed by the transferring insurers are as follows: (a) liability, professional risks, compulsory third party and workers compensation claims that are generally lodged by the policyholder or claimant; (b) asbestos and silicosis claims that are lodged under liability or workers compensation policies or professional indemnity policies, generally by the claimant or a solicitor representing the claimant; (c) molestation claims that are lodged under liability or workers compensation policies or professional indemnity policies, generally by the peak body or institution; and (d) home/builders warranty claims that are lodged under home warranty policies, generally by the claimant who is the home owner or solicitors representing the claimant if there is a dispute. 15 As at 30 June 2016, the transferring insurers had issued: (1) approximately 3,244,900 active policies; (2) approximately 3,593,300 expired policies over the three year period between 1 July 2013 and 30 June 2016; and (3) recorded approximately 138,600 open claims.

Overview of the schemes 16 IAL summarised the schemes in the following terms: 3.1 The essence of the Schemes is that each Transferring Insurer will transfer all of its existing insurance business to IAL. Effectively, IAL will assume the liabilities of each Transferring Insurer in respect of contracts of insurance issued, entered into or assumed by the Transferring Insurer. The substance of the Schemes is to provide for the transfer of policies held from seven insurers within a group to another within the same group. 3.2 IAL and the Transferring Insurers intend to execute a transfer agreement by which IAL will agree with the Transferring Insurers to assume their liabilities in respect of contracts of insurance issued, entered into or assumed by the Transferring Insurers in the course of their insurance businesses (Transfer Agreement). The terms of the Transfer Agreement form part of the Schemes. 3.3 In summary, the Schemes will have the following effect: (a) all of the insurance business of a Transferring Insurer, including all of the insurance contracts and insurance liabilities as well as certain assets and liabilities related to that business, will be transferred to IAL. IAL will indemnify the Transferring Insurer against all present, future or contingent claims, losses, liabilities, costs and expenses that might arise in connection with the insurance contracts; (b) the transfer will not change the terms of any insurance contract, or affect any claim in respect of any insurance contract issued by a Transferring Insurer, other than that IAL will become the insurer; (c) policyholders will continue to have the same rights and obligations under or in respect of any insurance contract or claim, but with IAL as the insurer; (d) all outstanding claims-related rights and liabilities of a Transferring Insurer in respect of the insurance contracts will be transferred to IAL such that any claims arising under or in connection with any insurance contract must be made against IAL, rather than the Transferring Insurer; (e) all premiums and other amounts payable to or recoverable by a Transferring Insurer under the insurance contracts will be payable to and recoverable by IAL; (f) IAL will be entitled to enforce all rights and remedies that but for the Schemes would have been enforceable by a Transferring Insurer under or in respect of the insurance contracts; (g) any policyholder under an insurance contract or other person who has a claim on or obligation to a Transferring Insurer under or in respect of an insurance contract will have the same claim on or obligation to IAL in substitution for his or her claim on or obligation to the Transferring Insurer irrespective of when such claim or obligation arose; (h) any stamp duty and other costs and expenses incurred in connection with the Schemes will not be paid by or charged to policyholders, but will be met by IAL; and (i) the transfers will take effect on 1 August 2017 or another date agreed between IAL and the Transferring Insurers and approved by the Court. 17 Ms Pearson's independent expert actuarial opinion is that the interests of the policyholders of the transferring insurers and IAL should not be adversely affected in a material way as a consequence of the schemes. That opinion is based on the following assessments: 2.1.1 Impacts on the Eight Insurers in Aggregate • The schemes are intra-group. The capital management approach, risk management, and external reinsurance arrangements for IAL post transfer (the aggregation of the eight insurers involved in the schemes) will not change as a result of the schemes. • The ultimate security currently provided to policyholders is from IAG Group and this would be unchanged. • Policyholders will have their policies and claims managed under the same practice and philosophy as before the transfer. • Policy terms and conditions will not change as a result of the schemes. • Post consolidation, IAL will hold appropriate provisions for liabilities. • Capital levels would be well in excess of the minimum regulatory level for IAL post transfer. I am satisfied that the schemes provide adequate financial security to the policyholders - while noting that there is always uncertainty with the outcome of insurance business, and ongoing solvency cannot be guaranteed. • The insurance business of the consolidated entities is expected to be profitable, which provides a further buffer against adverse experience. 2.1.2 Impacts on Policyholders of Individual Insurers • There are no material adverse changes to the risk profile for any group of policyholders. • The post transfer insurer will be larger and more diversified than any of the individual insurers pre transfer. • The estimated post transfer capital adequacy position is better than the pre-scheme position for all of the individual insurers except Swann and the two run-off entities HBF and MCGI. While the PCA Multiples would be lower post transfer for these entities, the expected PCA Multiple of 2.15 represents a healthy solvency position; in addition, the policyholders of these entities would benefit from being part of a larger and more diversified insurer. In my view there would not be any material increase in the risk to policyholders of Swann, HBF and MCGI. • The security provided to policyholders by external reinsurance would be unchanged. While the individual insurers except IAG Re Australia currently benefit from intra-group reinsurance provided by IAG Re Australia, the security of this cover is dependent on the financial position of IAG and this position is unchanged post consolidation. • The main change for the entities other than IAG Re Australia is direct exposure to the default and dispute risk relating to reinsurance of IAG's international business, and particularly the reinsurance recoveries relating to the NZ earthquake events which remain unresolved after more than five years. The entities are currently exposed to these risks via their reinsurance with IAG Re Australia as well as by being part of IAG Group, but the exposure becomes direct after the schemes. An assessment of this potential risk has satisfied us that it does not materially adversely impact the interests of the relevant policyholders.

The proposed process for notifying affected policyholders 18 IAL's evidence is that the proposed notification program will bring to the attention of a large number of affected policyholders both the proposed schemes and the right of policyholders to ask to be heard on the application for confirmation of the schemes. 19 In particular, IAL estimates that: (1) the proposed email notifications will reach policyholders of approximately 1,247,000 active policies; (2) the proposed mail notifications will reach approximately 71,900 policyholders; (3) information about the scheme in operational correspondence will reach over 1,200,000 policyholders. 20 These estimates do not include the prospect of policyholders becoming aware of the proposed scheme through the other elements of the notification program, which include: (1) wide and prominent advertising in national and regional newspapers on three separate occasions; (2) publication on a dedicated webpage, which will be linked to websites belonging to the IAG Group including the websites of IAG, CGU, Swann and WFI; (3) advertisements on IAG and CGU owned social media channels; (4) media releases about the scheme issued in conjunction with key regulatory milestones in the application process, and information about the schemes being included in IAG's half yearly results announcements; and (5) notification to: (a) the corporate office of solicitors who are known to represent claimants relating to asbestos and silicosis and home warranty claims; (b) key institutions and bodies that may be in contact with policyholders involved with molestation and home warranty claims; and (c) the Dust Diseases Tribunal in New South Wales. 21 In addition, IAL proposed to: (1) create an email enquiry facility and establish a 1800 telephone number to receive enquiries about the schemes arising from the notification program; and (2) make available to policyholders facilities to inspect the scheme documents in all capital cities at locations identified in the notice of intention of the confirmation application (which notice is required by s 17C(2)(b)).

Legal Framework 22 Section 17C of the Act provides: (1) In this section: "affected policyholder" means the holder of a policy affected by a scheme. "approved summary" means a summary approved by APRA. (2) An application for confirmation of a scheme may not be made unless: (a) a copy of the scheme and any actuarial report on which the scheme is based have been given to APRA in accordance with the prudential standards; and (b) notice of intention to make the application has been published by the applicant in accordance with the prudential standards; and (c) an approved summary of the scheme has been given to every affected policyholder. (3) Without limiting the provision that may be made by the prudential standards for the purposes of paragraph (2)(b), the notice referred to in that paragraph must include, in relation to each body corporate affected by the scheme, details of the place and time at which an affected policyholder may obtain a copy of the scheme. (4) An affected policyholder is entitled, on the person's request, to be provided by the company with one copy of the scheme free of charge. (5) The Federal Court may dispense with the need for compliance with paragraph (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. 23 The granting of a dispensation under s 17C(5) is a matter of considerable importance and should not be regarded as something to be allowed as a matter of course: Munich Reinsurance Company of Australasia Limited [2004] FCA 1391 at [4]. In The Application of Commonwealth Life Ltd & Anor [2003] FCA 501; (2003) ANZ Ins Cas 90-117, Sackville J said, in connection with an application for dispensation under s 191(5) of the Life Insurance Act 1995 (Cth), at [8]: Clearly enough, the policy underlying the statutory requirement, when read in conjunction with s 191(2)(b), is to give every affected policyholder a summary of the scheme and, an opportunity, if he or she so desires, to make submissions to the Court in respect of any application for confirmation of the scheme. 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. 24 The principle stated by Sackville J has been repeatedly approved in the context of applications for dispensation under s 17C. See, for example, Application of Gordian RunOff Limited under the Insurance Act 1973 (Cth) [2013] FCA 983 at [16]; AAI Limited, application under the Insurance Act 1973 (Cth) [2015] FCA 452 at [22]; QBE Insurance (Australia) Ltd, in the matter of Division 3A of Part IIIA of the Insurance Act 1973 (Cth) & QBE Insurance (Australia) Ltd [2015] FCA 1223 at [23] and Gordian Runoff Limited, in the matter of Gordian Runoff Limited [2016] FCA 1190 at [15]. 25 The discretion to make dispensation orders is a general one and the provision does not specify the criteria that the Court is to apply in determining whether "the nature of the scheme or the circumstances attending its preparation warrant" the making of proposed orders.

Affected policyholders 26 The expression "affected policyholder" refers to holders of a policy issued by one of the seven transferring insurers: cf. Re Insurance Australia Ltd [2004] FCA 524; (2004) 139 FCR 450 at [19]; QBE Insurance Australia Limited, in the matter of QBE Insurance Australia Limited [2012] FCA 1127 at [3]. 27 Although policyholders of IAL are not "affected policyholders" within the meaning of s 17C(2)(c), and are not required to be given an approved summary of the schemes, their interests will be a relevant consideration on the ultimate question of whether the scheme should be confirmed.

Underlying insureds 28 IAL noted that, as part of their insurance businesses, CGU, WFI and Swann offer, or have in the past offered, insurance policies where persons or entities, other than or in addition to the policyholder, receive the benefits of the relevant insurance cover as additional insureds or third party beneficiaries under master policy arrangements or individual policy terms ("underlying insureds"). Examples of such policies include: (1) group travel and expatriate insurance issued by CGU. Underlying insureds may include employees and volunteers of organisations who are covered under the policy held by the organisations, and groups of organisations that are covered under a group policy owned by a master organisation (for example, Bushwalking Australia holds a group policy and individual bushwalking associations may elect to be included under the master policy); (2) group personal accident and illness issued by WFI and CGU. While an organisation is the policyholder, cover may extend to board and committee members of the organisation (or volunteers for volunteer organisations) as underlying insureds; (3) personal legal liability insurance issued by WFI. Underlying insureds may include the policyholder's family as additional insureds on the policy; (4) commercial and residential strata insurance issued by WFI and CGU. Underlying insureds may include people or volunteers who provide unpaid/voluntary work for the strata company (who get personal accident cover under the insurance) and the strata council or body members (who get professional liability cover under the insurance); (5) home warranty insurance previously issued by CGU and Lumley. While a builder is the policyholder, the builder is specifically excluded from cover. Underlying insureds are the home owners; (6) directors and officers liability insurance issued by CGU. While an organisation is the policyholder, cover extends to directors and officers of the organisation; (7) motor insurance issued by WFI and CGU. Underlying insureds may include additional drivers who are named on the policy; (8) travel insurance issued by CGU. Underlying insureds may include additional persons named on the policy; and (9) general liability insurance, offered as part of another product or standalone, issued by WFI, CGU and Swann. Cover is provided for the policyholder and its authorised users (for example, under a boat insurance policy, the crew of the boat and invited passengers on board may be underlying insureds). 29 In many cases, the relevant insurance cover is extended to underlying insureds automatically and they do not have any rights that they can exercise in relation to matters such as contract formation, administration and cancellation. 30 IAL submitted that it would not be possible to identify reliably and estimate the number of underlying insureds in such arrangements and, depending on the policy type, contact details of underlying insureds may not be available because they are not captured. 31 IAL submitted that underlying insureds in the group or group-like policy arrangements described above are not "affected policyholders" for the purpose of the Act because they are not the persons to whom policies are issued and therefore not the holders of policies. It would follow that there is no requirement to provide them separately with a scheme summary. 32 In the recent decision of W.R. Berkley Insurance (Europe) Limited, in the matter of Division 3A of Part III of the Insurance Act (1973) [2016] FCA 374 ("Berkley"), Allsop CJ noted (at [17] -[18]): The application [for dispensation] has been made on the basis of an assumption that the broader group of those who obtain the benefit of the ultimate insurance are the affected policyholders. That assumption is one that in my view is soundly made, although I do not need to decide that as a matter of law. That assumption is at the base of this application, and in my view, it is a satisfactory and wise assumption. 33 IAL submitted that the assumption made by the applicants in Berkley as described above should not apply or govern the approach to be adopted in the present application and, more broadly, applications made under Div 3A of Pt III of the Act. 34 In Berkley, although four segments of the transferring business were identified, "Segment C" was the only segment in relation to which the Court expressly contemplated the possibility that members of a certain group or class could be considered to be affected policyholders. That segment was divided into the following subcategories: (1) individual master policies that covered people in a particular retail or other group, but where the individuals must apply through a broker for coverage under the master policy (for example, a gym that is covered under the Crossfit Affiliates master policy); and (2) group master policies under which the insurer agreed to provide cover for persons who from time to time are members of the relevant group and have certain qualifications (more commonly known as "group policies") - for example, nurses who are members of the Australian Nurses Federation are covered under a group policy held by the Federation. 35 IAL submitted that, while in Berkley Allsop CJ may have had particular reason to look favourably on the applicant's assumption that those persons are affected policyholders to whom prima facie a scheme summary is required to be given, the point was not argued before the Chief Justice and the wide variety of underlying insureds as described in [28] above must cast doubt on whether it is correct as a matter of law. In many cases, the insurer would not know the identity of the underlying insureds - for example, in policies referred to in 28, (2), (4), (5) and (9) above. It would be odd for Parliament to have intended insurers to be under what would be an impossible burden, subject only to the granting of dispensation by a court. 36 As noted in [22] above, "affected policyholders" is defined in s 17C(1) of the Act to mean "the holder of a policy affected by a scheme". The observations of Allsop CJ do not require a general conclusion that any individual who may obtain the benefit of an insurance policy is a holder of that policy. It is a question of fact whether an individual is a "holder" of a policy, to be determined by reference to the particular relationship between that individual and the relevant policy. In this case, the evidence does not support a conclusion that any of the various underlying insureds identified in [28] is the holder of a relevant policy. It is important to note that IAL's application is made on an ex parte basis and, accordingly, was accompanied by a duty of candour that required IAL to bring forward material facts from which it might have been inferred that the underlying insureds are, indeed, affected policyholders: cf Walter Rau Neusser Oel Und Fett AG v Cross Pacific Trading Ltd [2005] FCA 955 at [38]. 37 If I am wrong and the underlying insureds are "affected policyholders" under the Act, that determination would not impact the form of the dispensation orders made in this case as they provide complete dispensation subject to conditions. Further, many elements of the proposed notification program (in particular, the newspaper and internet advertisements) will apply equally to underlying insureds (albeit they will not be informed of the possibility that they might be affected policyholders). The reach of that program is of such significance that it is likely to elicit and bring to the Court's attention any reasonable objections to the schemes: cf Application of Sompo Japan Insurance Inc. under the Insurance Act 1973 (Cth) [2014] FCA 396.

Consideration 38 IAL submitted that the Court should be satisfied that, because of the nature of the schemes and the circumstances attending their preparation, it is not necessary that s 17C(2)(c) be complied with. 39 Based on the evidence set out above, I was satisfied that: (1) the schemes are not intended to result in any changes to policy terms and conditions for policyholders of the transferring insurers; (2) nor are the schemes intended to result in any changes to the claim management approaches and procedures for the transferring insurers; (3) I should accept Ms Pearson's independent expert actuarial opinion that the interests of the policyholders of the transferring insurers and IAL should not be adversely affected in a material way as a consequence of the schemes. 40 IAL submitted that the present dispensation application is analogous to the application decided by Emmett J in Re AAI Limited. His Honour's orders dispensed with the obligation to send the approved scheme summary to approximately 10 million affected policyholders, provided that (among other things) notification about the schemes was sent by email where an email address was available and included in regular operational correspondence, subject to certain exceptions. 41 IAL submitted that it would be excessive to require it to conduct a mass mail out campaign for the purpose of providing each of the affected policyholders with an individual copy of the approved scheme summary. It is estimated that such a mail out would be directed to 3.2 million policyholders and would cost between $3.2 to $3.5 million in addition to the substantial environmental costs of such a mail out. 42 I accepted IAL's submissions. Based on the evidence provided, I was satisfied that the proposed regime for notification of affected policyholders will be likely to lead to notification of a very large number of affected policyholders, sufficient to bring forth, in all likelihood any objection to the scheme that is based on viable objective grounds. 43 On that basis, and taking into account APRA's approval of the dispensation orders and the nature of the scheme as outlined above, I was satisfied that it was not necessary that there be compliance with s 17C(2)(c) and that it was appropriate to make the orders sought. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

APRA's position on dispensation application 6 Mr Claxton, who appeared on the application on behalf of APRA, informed the Court that APRA was consulted on the proposed notification program, and is satisfied with it. In particular, APRA is satisfied notwithstanding that the program generally does not involve giving policyholders the summary of the relevant scheme approved by APRA. 7 Mr Claxton informed the Court that APRA has satisfied itself that the program will provide a similar level of disclosure to the notification program ordered by Emmett J in AAI Limited, in the matter of AAI Limited [2012] FCA 1190 ("Re AAI Limited"). In that case, Emmett J granted dispensation orders in respect of four proposed separate but concurrent schemes to transfer the general insurance businesses of Suncorp Metway Insurance Ltd, GIO General Limited, Australian Alliance Insurance Company Limited and Australian Associated Motor Insurers Limited to AAI Limited. 8 The attitude of APRA to the dispensation application is significant: cf QBE Insurance (Australia) Ltd, in the matter of Division 3A of Part IIIA of the Insurance Act 1973 (Cth) & QBE Insurance (Australia) Ltd [2015] FCA 1223 at [13] and [27]; QBE Insurance Australia Limited, in the matter of QBE Insurance Australia Limited [2012] FCA 1127 at [18]; QBE Insurance (Australia) Limited, in the matter of QBE Insurance (Australia) Limited (No 2) [2012] FCA 1172 at [22]. APRA is the prudential regulator of general insurance businesses in Australia and, consequently, has an important role in ensuring that the interests of policyholders are protected. By s 17E of the Act, APRA is entitled to be heard on the application for confirmation of the scheme.

At a glance

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Judgment (9 paragraphs)

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