Most Read Contributor in New Zealand, September 2016
Section 9 of the Law Reform Act 1936, recently the
subject of the somewhat controversial Steigrad decision, has been held to apply to contracts
of reinsurance in a
High Court judgment delivered earlier this
Section 9 provides that, where a person is indemnified against
liability to pay damages or compensation, the amount of the
liability is subject to a charge on all insurance money that is, or
may become payable in respect of that liability. The
provision is an exception to the usual rule in insolvency that all
assets are distributed to the creditors on a pro-rata basis.
No previous New Zealand case has considered whether section 9
applies to reinsurance payments.
The High Court decision in Re Western Pacific Insurance
Limited concerned a failed insurance company, which went into
liquidation partly as a result of the multiple claims made after
the Canterbury earthquakes. At the time Western Pacific
Insurance Limited (Western Pacific) was placed into
liquidation, it had $60 million of unsettled claims (both
earthquake and non-earthquake related). Western Pacific had
reinsurance treaties which were triggered by some of the claims
resulting from the Canterbury earthquakes. The liquidators
say that those treaties cover $33 million of the claims which have
The liquidators of Western Pacific applied to the High Court for
a declaration that the reinsurance proceeds should be available to
all policy claimants and creditors, to be distributed in the usual
pro-rata way between all creditors (including policyholders).
The policyholders whose property was damaged in the September and
February quakes sought a declaration that section 9 applied to the
proceeds of reinsurance, and that they therefore have a statutory
charge over the money.
In this landmark case, and in line with Australian legislation
which deals expressly with reinsurance payments, the High Court
found that section 9 does extend to the proceeds of reinsurance
treaties. On the essential issue, the Court accepted that the
reinsurance was for the purpose of indemnifying Western Pacific in
respect of Western Pacific's liability "to pay damages
Section 9 therefore creates a statutory charge over the
reinsurance moneys which are payable to the reinsured. In
Western Pacific's case, the statutory charge is enforceable by
the Canterbury policy holders.
The upshot of the decision is this: where reinsurance treaties
are triggered, and the reinsured is insolvent, the proceeds of
reinsurance cannot be distributed to all creditors of the
insurer. Careful thought should be given to the application
of the pool of reinsurance funds, as a third party may be entitled
to a charge over, and therefore hold a prior-ranking claim to,
Chapman Tripp acted for some of Western Pacific's
reinsurers in relation to this proceeding. Chapman Tripp obtained
consent orders on behalf of those reinsurers, which ensured that
they did not need to be actively involved in the hearing which led
to the decision in this case.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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