PMI Indemnity Limited [2005] FCA 1473

Federal Court of Australia|2005-09-13|Before: Lindgren J

REASONS FOR JUDGMENT 1 The applicants, PMI Indemnity Limited ('Indemnity') and PMI Mortgage Insurance Limited ('Mortgage'), apply under Division 3A of Part III of the Insurance Act 1973 (Cth) ('the Act') for orders under that Division confirming a proposed scheme to transfer Indemnity's insurance business to Mortgage . The substantive application is fixed for hearing on 16 November 2005. 2 By an amended notice of motion, the applicants seek an order under s 17C(5) of the Act dispensing with the need for compliance with para (2)(c) of s 17C. Subsection 17C(2) provides that an application for confirmation of a scheme may not be made unless, relevantly: '(c) An approved summary of the scheme has been given to every affected policyholder.' 3 Since s 17E provides that any of the bodies corporate affected by a scheme may apply to the Court for confirmation of it, and in the present case both bodies corporate affected by the scheme are applicants for the confirmation, it is appropriate that both apply for the dispensation under s 17C(5). 4 The evidence in support of the motion is found in two affidavits of Linda Quatermass, the legal counsel of Indemnity and Mortgage. 5 Both Indemnity and Mortgage are incorporated in Australia. Both are indirectly wholly owned subsidiaries of The PMI Group Inc ('Group'), a corporation listed on the New York Stock Exchange. 6 Indemnity was acquired (indirectly) by Group in September 2001. Prior to the acquisition, Indemnity was known as CGU Lenders Mortgage Insurance Limited ('CGU'). At various times prior to that it had other names. 7 Mortgage and Indemnity conduct only a lenders mortgage insurance business, that is, a business of indemnifying home mortgage lenders against loss they may suffer in the event of default by the borrower. 8 The 'affected policyholders' within s 17C(2)(c) are the lenders insured by Indemnity. The loans have been in respect of the purchase of residential properties in Australia and New Zealand. An application is being made to the High Court of New Zealand in connection with a proposed transfer of the policies written in New Zealand to the New Zealand branch of Mortgage.

9 Since 1 July 2002, Indemnity has been in run-off, writing insurance business only: (a) for transactions to which it had previously committed; and (b) 'top-up' insurance for existing loans. 10 The evidence shows, as one would expect, that the longer a policy is on foot the less likely it is that the lender will claim indemnity under it. 11 The term of a policy is usually equal to the life of the loan, which may be as long as thirty years. 12 According to the evidence, the incidence of claims is biased towards the early years of the term of the insured loan, tending to peak at year three then diminish and reduce significantly in year six and following years. The risk of a claim being made is greater in the initial five years of the policy than later. 13 There are approximately 180,500 separate lenders mortgage insurance policies written in Australia by Indemnity which remain on risk, or potentially on risk, as at 31 May 2005. Of course, this does not mean that there are 180,500 lenders. 14 Among the CGU files taken over by Group were eight files, one for each State and Territory, entitled, for example, 'Inactive Lenders - NSW'. The Inactive Lenders files contain references to certain policies written by Indemnity (then CGU) before it was acquired by Group. 15 Policies were designated as 'inactive' in the CGU files if there was no claim, including cash flow, nor variation of the mortgage for approximately five years prior to the policy being designated 'inactive', and there has been no such event subsequently. There are 4,563 policies in the Inactive Lenders files, and Indemnity has many more than that number that have been designated 'inactive' in accordance with the criteria mentioned above. 16 The only information in Indemnity's records with respect to each inactive policy that would allow the policyholder to be identified is the address of the security the subject of the loan and the name of its registered proprietor as at the time when the policy was entered into. 17 For the purposes of the scheme, Indemnity has assumed that all of the policies are on risk, except where there has been a notification of discharge of the loan. 18 Of the 4563 'inactive policies' in the Inactive Lenders files, 3380 were written up to and including the year 1989. Since they are at least some 16 years old, Indemnity has treated them for present purposes as involving either a very small risk indeed, or as being off risk. The remaining 1183 policies relating to Inactive Lenders were written since 1 January 1990. 19 Ms Quatermass has caused searches to be carried out by Residex Pty Ltd in relation to 919 of these policies, being those in respect of properties in New South Wales, Queensland, Victoria, Western Australia and the Australian Capital Territory. In the case of 394 of them, ownership of the property has changed since the policy was issued and so it can be assumed that the loan was discharged. The remaining 525 properties are still in the same ownership and so in those cases there is at least the possibility of a default occurring giving rise to a liability under the policy. 20 Searches were also conducted in respect of properties in South Australia, Tasmania and the Northern Territory. 21 The searches and inquiries reveal that of the total of 1183 policies in the Inactive Lenders files written since 1 January 1990: (a) 567 have been determined as likely to be off risk as a result of a change in the registered proprietor; (b) 302 were determined to be potentially on risk because of the absence of any change in registered proprietorship; (c) one policy has been determined to be a duplicate of another 'inactive' policy; and (d) there remain 313 policies for which insufficient or incorrect data have prevented Indemnity from identifying the relevant policyholder and determining whether or not the policyholder is on risk. 22 Of the 302 policies determined to be potentially on risk, Ms Quatermass compared the mortgagee listed on the title search for each property with the list of policyholders that Indemnity had already identified. There were 11 mortgagees on the 302 title searches that had not previously been identified as policyholders of Indemnity. Ms Quatermass therefore assumed that these 11 additional mortgagees were 'affected policyholders' required to be notified of the proposed scheme. 23 In the result, there remain 313 post-1 January 1990 policies that are possibly on risk for which the policyholders remain unidentified. Indemnity has been able to identify 260 policyholders in Australia for whom it has obtained addresses. A copy of the approved summary of the scheme will be provided to all of them.

24 In substance, the present application is made in respect of those policyholders who have not been able to be identified. There are 3693 policies for which Indemnity has not been able to identify the policyholders. Of the 3693, 3380 were written up to 31 December 1989. Of the remaining 313: · only two were written in 1997 (and they are the latest policies of the 313 to have been issued); · approximately 37 percent were written between 1994 and 1996; and · approximately 62 percent were written between 1990 and 1993. 25 Ms Quatermass states in her first affidavit: '54. In summary: (a) the total Indemnity policies on‑risk or potentially on‑risk number approximately 180,500 as at 31 May 2005; (b) approximately 98% of those policies have been identified as being held by the 260 policyholders in the Master List identified by investigations undertaken on behalf of Indemnity; and (c) the approximate number of policies for which a policyholder remains unidentified number 3,693, of which 3,380 were written before 1990. 55. The small proportion of policyholders whose details have not been identified (in relation to the 3,693 policies) represents approximately 2%, I am informed, and I believe, that past claims experience suggests that it is unlikely there will now be claims made under these policies. 56. I believe that indemnity has undertaken all inquiries which, in the circumstances, are reasonable to seek to identify all of the affected policyholders. Of the 313 policies written in 1990 or later for which no policyholder could be identified, there are no further searches that could be done on the basis of Indemnity's records, as Indemnity's records did not contain even enough information to identify the property the subject of the policy. For the 3,380 policies written before 1990 I am informed and I believe that the risk of a claim now being made is so small that it is not reasonable to conduct extensive searches to seek to identify the policyholders.' 26 In addition to publication of details of the proposed scheme in the Australian Government Gazette and The Australian newspaper, Indemnity will send a copy of the approved summary of the scheme to all policyholders whose identity is known and to every authorised deposit-taking institution regulated by the Australian Prudential Regulation Authority (APRA) under the Banking Act 1959 (Cth). 27 APRA, which is entitled to be heard on the application for confirmation (see s 17E(3) of the Act), has appeared on the present application and does not raise any objection to the orders sought in the notice of motion.

28 Having regard to the degree of risk involved and the steps that will be taken to bring the proposed scheme to the notice of policyholders I think the orders sought in the amended notice of motion should be made. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Solicitor for the Applicants: Allens Arthur Robinson

Solicitor for APRA: Mr M Murray of the Australian Government Solicitor

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