Westport Insurance Corporation, in the matter of Westport Insurance Corporation [2009] FCA 1357

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 the Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION NSD 1220 of 2009

(ABN 48 072 715 738) The application of WESTPORT INSURANCE CORPORATION (ABN 48 072 715 738)

Introduction 1 Section 17B(1) of the Insurance Act 1973 (Cth) (the Act) provides that no part of the insurance business of a general insurer may be: (a) transferred to another general insurer; or (b) amalgamated with the business of another general insurer; except under a scheme confirmed by the Federal Court. 2 Section 17C deals with steps that are to be taken before the application for confirmation is made. One of the requirements is that an approved summary of the scheme must be given to every affected policyholder: s 17C(2)(c). However, subs (5) of s 17C provides that the Court may dispense with the need for compliance with this requirement 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 requirement be complied with. 3 This proceeding concerns two schemes. The applicant, Westport Insurance Corporation (Westport), is a body corporate affected by each of them and therefore has standing under s 17E of the Act to apply for confirmation of each scheme. 4 Westport applied by notice of motion under s 17C(5) of the Act for a dispensation with the need for compliance with s 17C(2)(c), on condition that there be a different regime for bringing the schemes to the notice of affected policyholders. 5 On 13 November 2009 I made the orders sought. They appear at the front of these reasons for judgment. I did so for the reasons expressed below. 6 On the hearing the Australian Prudential Regulation Authority (APRA) appeared and was heard: see s 17E(3) of the Act. APRA raised no objection to the making of the orders.

Background 7 There two schemes are: (a) the "Insurance Scheme", under which the direct insurance business of Westport's Australian branch will be transferred to the Australian branch of Swiss Re International SE (SRI); and (b) the "Reinsurance Scheme", under which the reinsurance business of Westport's Australian branch will be transferred to the Australian branch of Swiss Reinsurance Company Ltd (I will refer to this company as SRC, and to its Australian branch as SRCAU). 8 Westport is a subsidiary of SRC. Both proposed transfers are "intra-group" transfers. 9 Westport is incorporated in the United States of America. It is authorised under the Act to carry on insurance business in Australia, as are SRC and SRI. Each of Westport, SRC and SRI carries on its insurance business in Australia through an Australian branch. 10 Westport (formerly known as "Employers Reinsurance Corporation") has operated its branch in Australia from 1996, writing both direct insurance and reinsurance. As at 31 December 2008, Westport's liabilities were approximately 18% direct insurance liabilities and 82% reinsurance liabilities. 11 Westport's direct insurance business and reinsurance business were written by Westport itself or through brokers and underwriting agents on its behalf. 12 SRC acquired Westport in 2006. From October 2006, Westport ceased to write or renew any reinsurance. 13 The nature of the direct insurance written by Westport is varied, but it is principally (about 90%) "short-tail" in nature, which means that reliable estimates as to claims can be made within two years of the conclusion of the period of insurance. The "long-tail" part of the direct insurance portfolio is principally casualty insurance. According to the affidavit evidence, most of the holders of policies of direct insurance are located in Australia and New Zealand. 14 Westport's reinsurance business comprises all structures of reinsurance (proportional, non-proportional, treaty and facultative), and many classes of insurance business. Most of the holders of policies of reinsurance are also located in Australia and New Zealand. 15 Claims made on Westport are currently handled by its parent, SRC.

Who is an "affected policyholder"? 16 The term "affected policyholder" is defined in s 17C(1) of the Act as "the holder of a policy affected by the scheme". In Re Insurance Australia Ltd (2004) 139 FCR 450 (Re Insurance Australia Ltd)at [19]-[20], I held: · that the expression "affected policyholder" referred to a policy that was affected by the scheme, not to a holder who was affected by the scheme; and · that the holders of policies that had been issued by the transferee company, or that had been issued by the transferor company but were not to be transferred under the scheme were not "affected policyholders". 17 In the present case, all of the direct insurance policies and all of the reinsurance policies of Westport are sought to be transferred to either SRI or SRCAU. It follows that all of Westport's policyholders are "affected policyholders". The policyholders of SRI and SRCAU, however, are not, and are therefore not required by s 17C(2)(c) to be provided with an approved summary of either scheme.

The need for the dispensation 18 Westport seeks a dispensation because it is not able to identify all of its policyholders, and is therefore unable to comply with s 17C(2)(c). 19 There is an additional reason why a dispensation is sought. This additional reason applies to certain policyholders that Westport has been able to identify. 20 Section 17C(2)(c) requires that the approved summary be "given" to affected policyholders. Section 121 of the Act provides various ways in which a document may be "given" to a person for the purposes of the Act. In the case of a body corporate other than Lloyd's (being the society of that name incorporated by Lloyd's Act 1871 (UK)) that is not incorporated in Australia, s 121 provides that the document may be given by being left at, or by being sent by registered post to, the body corporate at its address for service notified to APRA. Where no such address has been notified to APRA, the Act appears to require that the document simply be "given" to the body corporate, as distinct from being posted to it at its last known address, without explanation as to how it is to be "given" to the foreign body corporate. 21 Section 29 of the Acts Interpretation Act 1901 (Cth) does not assist because it is enlivened only where an Act authorises or requires a document to be served by post. 22 Westport therefore asks that the Court permit an alternative means of service. The issues affecting each scheme are dealt with in turn.

The Insurance Scheme 23 In relation to the Insurance Scheme, Westport relies on an affidavit of Karen Lancaster, the Technical Accounting Consultant of SRI. 24 Ms Lancaster performed a search of Westport's computer systems to identify the holders of policies of insurance written by it. Having identified a policyholder by name, Ms Lancaster undertook various searches (both of Westport's records and of publicly available sources of information) to determine a current address for that policyholder. Ms Lancaster created a spreadsheet that contained the information that her searches elicited. 25 Where policies were written through brokers or underwriting agents, however, it was often the case that no policyholder details had been notified to Westport. In those casesMs Lancaster identified the brokers and underwriting agents through whom Westport had written insurance, and wrote to them asking for assistance in identifying policyholders. As a result of those inquiries: (a) some brokers/agents provided policyholder details to Ms Lancaster, and Ms Lancaster added those details to her spreadsheet; (b) some brokers/agents provided details of policyholders to Ms Lancaster, but said that they would notify them rather than have Westport do so directly; (c) some brokers/agents indicated that their clients did have policies of insurance with Westport, but that identifying those clients would be difficult or time consuming. In some cases, the view was expressed that it was unlikely that any claims would be made on the policy in the future; and (d) some brokers/agents indicated that their clients did have policies of insurance with Westport and that to identify those clients would be difficult or time consuming, but those brokers/agents provided details of policyholders with open claims. Ms Lancaster added those details to her spreadsheet.

26 In some cases, the address details for policyholders provided by brokers/agents did not contain a street number. Ms Lancaster performed searches in an attempt to identify a street number for those addresses, but was not always successful.

27 In relation to the brokers/agents who indicated a preference to contact their clients rather than have Westport notify them directly, Westport also wrote to them seeking to obtain assurances that they would assist in that regard. 28 Over all, therefore, it is apparent that there may be many thousands of policyholders (albeit, ones unlikely ever to make a claim against Westport) that will not be sent a copy of the scheme summary. It is because of this, in addition to the general risk that Westport's searches may not have identified some policyholders, that a dispensation is sought in relation to the Insurance Scheme. 29 Ms Lancaster is not aware of any further searches that Westport could reasonably have undertaken with a view to ascertaining the identities and addresses of affected policyholders.

The Reinsurance Scheme 30 In relation to the Reinsurance Scheme, Westport relies on the affidavit of Xenia Zumbach-Hauenstein, a Vice President of Client Markets of SRCAU. 31 Ms Zumbach-Hauenstein arranged for a search to be performed of Westport's computer systems to identify affected policyholders of Westport's reinsurance business (the reinsureds). The resulting data was used to create a list of all of Westport's Australian branch's reinsureds and their addresses. 32 Various publicly available sources of information were then used to confirm contact details for the policyholders. The addresses of all but 14 were verified in this way. In the course of the search, it was discovered that some policyholders had been deregistered. 33 Westport is not aware that it has failed to identify any of its reinsureds. Nevertheless, in case there is some defect in its records or there has been an inadvertent omission, and also for the reasons relating to the manner of giving notice to foreign bodies corporate mentioned above, a dispensation is also sought in relation to the Reinsurance Scheme.

Additional steps to be taken 34 Westport will take additional steps to ensure that as many affected policyholders as possible receive notice of the schemes. 35 In relation to the Insurance Scheme, Westport will send a copy of the approved summary to every broker or underwriting agent through whom it is known to have written insurance. In this way, those brokers/agents will be able to notify their clients of the Insurance Scheme, either now or at the very least in the event that a claim is made in the future. 36 In relation to the Reinsurance Scheme, Westport will send a copy of the approved summary to every insurer authorised to conduct an insurance business in Australia. Given that insurers are the main holders of reinsurance policies, this will be likely to provide notice of the scheme to any affected policyholder who has been omitted. 37 Westport will also publish a notice in the Government Gazette, The Australian and the Australian Financial Review that contains information about the schemes. Such a notice is required to be published pursuant to para 9 of Prudential Standard GPS 410 (Transfer and Amalgamation of Insurance Business for General Insurers), and must be approved by APRA. The notice will ensure that affected policyholders who are not supplied directly with a scheme summary will have a means of learning of the scheme.

Discretion 38 The Court has said that the granting of a dispensation under s 17C(5) (or its analogue in the Life Insurance Act 1995 (Cth), s 191(5)) is a "matter of considerable importance and should not be regarded as a matter of course": Munich Reinsurance Company of Australasia Limited [2004] FCA 1391 at [4], per Tamberlin J. See also Challenger Life Limited [2004] FCA 618 (Challenger Life Limited) at [2]-[3], per Gyles J. This is because, as Sackville J stated in The Application of Commonwealth Life Ltd & Anor [2003] FCA 501 (Commonwealth Life Ltd) at [8]: Clearly enough, the policy underlying the statutory requirement … 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. 39 Ultimately, the discretion to grant a dispensation pursuant to s 17C(5) is a general one. The section does not specify criteria that the Court is to apply in determining whether "the nature of the scheme or the circumstances attending its preparation" warrants the making of an order. Accordingly, the range of potential matters to which the Court may properly have regard is wide. 40 I concluded that it was appropriate for the Court to exercise its discretion under s 17C(5) in the circumstances of the present case for the following reasons. 41 First, a full search of Westport's records has been undertaken. Westport has no means of compelling brokers/agents to conduct searches on its behalf. Westport has done all that is within its power, and is confident that it has identified every policyholder contained within its own records. The diligence of the search that has been undertaken is a consideration relevant to the decision whether or not to grant a dispensation: Calliden Group Limited in the matter of Calliden Group Limited [2007] FCA 2019 (Calliden Group Limited) at [62]. 42 Second, the evidence is that the direct policyholders who have not been identified are unlikely ever to make a claim. The policies that they hold are short-tail in nature, and it can be assumed that any claim would have been notified by now. The chance of the unidentified policyholders being affected by the scheme in reality, as distinct from theoretically, is therefore low. 43 Re Insurance Australia Ltd involved the transfer of a portfolio of 72,500 compulsory third party motor accident insurance policies. I noted that, given the length of time since the expiration of the last period of insurance, it was unlikely that many further claims would be made. I considered that it would be "excessive" to require notice to be given to all 72,500 policyholders, and required that notice only be given to those policyholders in respect of whose policies there was a notified claim that was unsettled or was otherwise outstanding: see [26]-[27]. See also Calliden Group Limited at [62]. 44 Third, the additional steps to be taken by Westport give comfort that the scheme may well come to the notice of affected policyholders. 45 In In the matter of GIO Personal Investment Services Ltd and AMP Life Ltd [2000] FCA 1871 (GIO Personal Investment Services Ltd), Emmett J noted (at [16]-[18]) that, despite certain steps being taken to keep track of policyholders, the company did not have a current address for all its policyholders. His Honour observed that a notice of intention to make the application had been published in newspapers in all States and Territories, and that the notice included a telephone number by which policyholders could make enquiries and request copies of the scheme summary documents free of charge. Given the steps that the company had taken to locate its policyholders, and the alternative steps that the company had taken to draw the scheme to their attention, his Honour considered it appropriate to dispense with compliance with s 191(2)(c) of the Life Insurance Act 1995: see [19]. 46 The fact that additional steps will be taken to draw the scheme to the attention of the affected policyholders (see [33]-[36] above) has been held to be a factor favouring the granting of a dispensation under s 17C(5) (or the equivalent provision of the Life Insurance Act 1995)in several cases, including GIO Personal Investment Services Ltd at [18], Commonwealth Life Ltd at [6] and [10], Challenger Life Limited at [5], and Calliden Group Limited at [62]. 47 Fourth, the proposed scheme is an "intra-group" scheme, that is to say, the policies are being transferred not from one corporate group to another, but within the Swiss Re group. Because the transfer will not involve any real change in the practices and "culture" of the insurer, there seems to be a reduced imperative for notification. This consideration has been relied upon as supporting the granting of a dispensation: MMIA Pty Limited and QBE Insurance (Australia) Limited [2008] FCA 1239 at [24]; Calliden Group Limited at [62]. 48 Fifth, APRA does not oppose the making of the order. The fact that APRA, which is charged with the responsibility of protecting the interests of policyholders, has raised no objection has been said to be a matter in favour of a dispensation: see, eg Commonwealth Life Ltd at [6] and [10], Challenger Life Limited at [5]; Calliden Group Limited at [62].

Conclusion 49 It was for the reasons expressed above that I made the orders on 13 November 2009. I certify that the preceding forty-nine (49) 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 the Australian Prudential Regulation Authority: Mr L B Weate