QBE Insurance Australia Limited, in the matter of QBE Insurance Australia Limited [2012] FCA 1127

REASONS FOR JUDGMENT 1 QBE Insurance (Australia) Limited (QBE) has commenced a proceeding in which it seeks confirmation of a proposed scheme under s 17F(1) of the Insurance Act 1973 (Cth) (the Act). Prior to making its formal application to the Court for confirmation, it seeks interlocutory relief in the form of dispensation from what would otherwise be the requirements of the Act. 2 The scheme involves the transfer of the general insurance business of Elders Insurance Limited (Elders Insurance) to QBE. Elders Insurance is incorporated in Australia and is authorised to carry on insurance business in Australia. It has done so since 1998. Elders Insurance was a member of the Elders Limited Group of companies until 30 September 2009, when it was acquired by QBE Holdings (AAP) Pty Limited and became a member of the QBE Insurance Group. The QBE Insurance Group is an international insurance group based in Australia. 3 Section 17C of the Act sets out various steps that must be taken before an application for confirmation of a scheme may be made. Section 17C(5) authorises the Court to make orders dispensing with the need for compliance with s 17(C)(2)(c). One of the requirements under s 17(C)(2)(c) is that the applicant must give an approved summary of the scheme to every affected policyholder. An affected policyholder is a person holding a policy of insurance that is affected by the scheme, but not necessarily every holder of a policy issued by an insurer that is a party to the scheme. The Court may make an order if it is satisfied that, because of the nature of the scheme or the circumstances attending its preparation, it is not necessary that that requirement be complied with. 4 In order to put the present application in context, it is necessary to say something more about the business of Elders Insurance that will be the subject of transfer under with the proposed scheme. The Elders Limited Group has distributed general insurance products through a network of agents for more than 100 years. Elders Insurance underwrites a large range of general insurance policies, many of which relate to risks borne by individuals and enterprises in rural and regional areas. Following the acquisition of Elders Insurance, QBE has taken steps progressively to transfer the underwriting of Elders Insurance policies to QBE. 5 The first step involved reinsuring existing Elders Insurance policies with QBE or its reinsurers, such that the economic risk in relation to existing policies was transferred to QBE and its reinsurers. Secondly, new and renewing policies have begun to be issued by QBE rather than Elders Insurance. Under the proposed scheme, all insurance liabilities of Elders Insurance will be transferred to QBE, the intention being to align the legal position with the economic reality, making QBE legally, as well as economically, responsible as the insurer of the relevant policies. 6 There are several categories of policy in respect of which dispensation is sought. It is necessary to say something first about the category of insurance described as Wool in Transit and Livestock in Transit. Such policies are sold only to persons who have a trading account with Elders Limited. They provide cover for losses sustained in transport in wool or livestock on a particular nominated journey. Elders Limited does not inform Elders Insurance which of its customers have applied for such insurance; nor does it provide details about the journeys or shipments to which any insurance relates. Rather, Elders Limited simply informs Elders Insurance of the premiums it has received and the claims that it has paid, on a bordereau basis. 7 Policyholders' details in relation to such insurance are held by Elders Limited, with no contractual right on the part of Elders Insurance to obtain the information from Elders Limited. While Elders Limited is able to identify a person who has applied for such insurance, it is not readily able to identify whether the persons who have applied for such insurance have actually notified a particular journey; nor is it readily able to ascertain when any such notification was made. Thus, Elders Insurance is not able to identify persons who may be insured under such policies. The policyholders deal directly with Elders Limited in relation to the payment of premiums and the making of claims. It is not proposed to notify those policyholders of the scheme. 8 QBE proposes that all policyholders with open claims and all policyholders who hold current policies will be notified. However, there are three other categories of policies in respect of which dispensation is sought. They are described as long tail policies, which expired in 2006 or later; short tail policies, other than crop insurance, which expired in 2010 or later; and crop insurance policies, which expired in 2012. Those cut-off dates were determined by reference to an actuarial assessment of the time periods within which claims are usually notified on different classes of policies. It is desirable to say something about those three categories. 9 Mr Jarrod Bayl is an associate of the Institute of Actuaries of Australia. He has, for some years, been employed by a subsidiary of the QBE Group and is presently employed as an actuarial adviser. Mr Bayl has prepared a table setting out the results of calculations that he has made concerning policies issued by Elders Insurance. Elders Insurance keeps records in respect of its insurance business on the computer system described as I90. The information recorded in the system includes policyholder name and address data for all types of policies issued by Elders Insurance, other than Wool in Transit and Livestock in Transit policies. The system contains information about claims on such policies, with the exception of crop insurance policies written from 2009, which is held on systems maintained by the crop insurance underwriting agent, Agricola Underwriting Management Pty Limited (Agricola). As I have said, the policy and claims information for wool in transit and livestock in transit is only recorded in bordereau form. 10 Based on the information contained in the I90 system as to the date on which claims are reported and the expiry dates of relevant policies, Mr Bayl has calculated for each claim relating to classes of business written by Elders Insurance, other than the Wool in Transit, Livestock in Transit and crop insurance policies, the delay between policy expiration and the claim being reported. He then used that information to calculate the proportion of claims that have been reported by duration after policy expiration, using yearly intervals. 11 Mr Bayl categorises long tail policies as including business package liability policies, farm package liability policies, stand alone liability policies, professional indemnity policies and personal accident liability policies. His calculations indicate that, for those policies, almost all claims are reported within six years of policy expiry. Indeed, his calculations show that all claims on all of those policies other than farm package liability policies were reported within six years and claims on only one in one thousand farm package liability policies were not reported within six years. Mr Bayl concludes that policyholders whose most recent policy expired in 2005 and earlier are highly unlikely to make a claim now or in the future. 12 In relation to crop insurance policies, the claims information obtained by Mr Bayl from Agricola provides the dates on which claims were finalised, but does not include the dates on which the claims were reported. Clearly, however, a claim could not be finalised before being reported. Based on that information, Mr Bayl analysed for crop insurance the number of claims finalised in each quarter of each of the three most recent underwriting years. That analysis indicated that almost all claims are finalised within one year of inception of the policy. He therefore draws the inference that almost all claims are reported within one year after the inception of the policy. That inference is supported by the policy conditions for crop insurance, which require the insured to provide written notice within 48 hours of the occurrence of any loss or damage. Mr Bayl concludes therefore that it is highly unlikely that policyholders whose most recent policy expired in 2011 or earlier will make a claim now or in the future. 13 All other types of policies recorded in the I90 system are categorised by Mr Bayl as short tail covers. His calculations indicate that almost all claims in respect of such policies are reported within two years of policy expiry. He draws the inference therefore that the policyholders whose most recent policies expired in 2009 or earlier are highly unlikely to make a claim now or in the future. 14 As I have said, it is proposed that QBE will notify all policyholders with an open claim and all policyholders who have current policies. Only the three categories to which I have referred will be the subject of dispensation. The effect is that all relevant policyholders, other than those who are highly unlikely to make a claim, will be notified of the proposed scheme, apart from the Wool in Transit and Livestock in Transit policies. 15 The names and addresses of the classes of policyholders that are proposed to be notified were obtained from the I90 database maintained by Elders Insurance on 19 July 2012. The database information was compared with an Australia Post database. That comparison indicated that 86.6 per cent of the addresses in the database were exact matches with addresses recognised by Australia Post. It is likely that a substantial portion of the remaining addresses are accurate, the reasons for the discrepancy being minor typographical errors or quirks of rural addresses. There were 318,915 policyholders when the data was obtained from the I90 system. An update was obtained on 31 August 2012 and it is proposed that a final update will be obtained on 7 September 2012, in order to obtain the details of additional policyholders to be notified since the initial extract was obtained. The additional number is not expected to be more than several hundred. 16 It is against that background that QBE seeks an order under s 17C(5) of the Act. 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. The discretion 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 of its preparation warrant the making of an order. The range of potential matters to which the Court may have regard is therefore fairly wide. QBE proposes to take additional steps to ensure that those policyholders who are not to be notified directly of the proposed scheme will have ample opportunity to be informed. 17 Elders Insurance has taken reasonable steps to identify the policyholders who may make a claim. In addition, QBE will publish a notice regarding the scheme in newspapers circulating in each State and Territory, as well as in numerous rural and farming publications. It will provide a link to the scheme documents on the Elders Insurance website and will establish a telephone service by which policyholders will be able to find out more about the scheme. The scheme documents will be made available for inspection at a location in each State and Territory and a copy will be provided to any affected policyholder on request. Each Elders agent will also be informed of the scheme and be provided with information that would assist in answering any questions raised by policyholders. 18 It is significant that the Australian Prudential Regulation Authority (APRA), which has been represented on the hearing of this application, does not oppose the making of the order. APRA is charged with the responsibility of protecting the interests of policyholders and the fact that APRA, having heard the nature of the application, raises no objection is a factor to be taken into account in favour of granting dispensation. In any event, the making of an order at this stage would not preclude the matter being considered at the time of the hearing of the application for confirmation of the scheme. The application is made at this stage as a matter of convenience. It would be unfortunate if the steps were taken and, at the time when the scheme was submitted for confirmation by the Court, the Court took the view that there should be no dispensation. For that reason, it is common practice for this kind of application to be made on an interlocutory basis prior to the final hearing of the application for confirmation. 19 In all of the circumstances, I consider that it is appropriate for orders to be made dispensing with the requirement that an approved copy of the scheme summary be provided to every affected policyholder, subject to compliance with conditions along the lines that I have indicated. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.