Your insurer goes bust – can you as an insured claim
the reinsurance proceeds? An important decision in the NSW Supreme
Court gives useful guidance on when a court will allow departures
from the statutory scheme controlling the application of
reinsurance proceeds (Amaca Pty Ltd v McGrath & Anor as
liquidators of HIH Underwriting and Insurance (Australia) Pty
Ltd  NSWSC 90).
The insurer goes broke, and there are all these claimants at
Amaca and the other plaintiffs are subject to insolvent external
administration. They are also subject to claims from people with
asbestos-related illnesses. Their ability to meet liabilities to
asbestos victims, as and when those liabilities are established,
depends in part on obtaining insurance proceeds.
Unfortunately, the insurer, HIH, is also in liquidation.
The plaintiffs wanted the court to order two things:
first, they wanted it to exercise its power under section
562A(4) of the Corporations Act 2001 (Cth) to change the
application of the reinsurance proceeds already in hand, with the
effect that the amounts would be applied exclusively towards
satisfaction of the plaintiffs' debts or claims cognisable in
the winding up;
secondly, they wanted this order to extend to moneys yet to be
received by the liquidators, and to control how they are to be
applied if and when received.
HIH's liquidators neither consented to nor opposed the first
aspect of the plaintiffs' claim, but they did oppose the
application as it related to moneys to be received in the
The relevant law: section 562A of the Corporations Act 2001
Section 562A only applies to insurance companies: if an
insolvent insurance company has reinsurance, the proceeds of that
reinsurance are to be distributed to the holders of the relevant
As a result, reinsurance proceeds are quarantined from the
general pooling of assets and pari passu distribution among all
Subsections (2) and (3) set out the general rules of
distribution. The crucial subsection in this case was subsection
(4), which allows the court to override the statutory scheme if it
is considered to be "just and equitable in the
circumstances", which is what Amaca was asking for here. The
factors that a court may take into account in making an order under
subsection (4) are set out in subsection (5).
The money in hand and severe prejudice
One of the factors a court may consider when it is asked to make
an order under section 562A(4) is "whether a person to whom an
amount is payable under a relevant contract of insurance would be
severely prejudiced if subsections (2) and (3) applied to the
amount received under the contract of reinsurance."
What is severe prejudice? For example, in this case, does it
matter if asbestos claimants would get less money if the scheme
were not altered? Not according to Justice Barrett: while their
position is socially important, it is not relevant to whether an
order under section 562A(4) ought to be made.
Neither is it relevant that an order would reduce the money that
would have to be contributed by other sources, including the new
Hardie Group or government loans.
The only relevant consideration here was that the reinsurance
was designed to benefit the plaintiffs because it would offset the
theoretical exposure of the insurer, and that they would be denied
that benefit if the scheme were not altered. It would be just and
equitable therefore to make the order requested relating to the
money in hand.
What about the money yet to arrive?
That is another question entirely, said Justice Barrett. No
court has the power to make an order under section 562A(4) with
respect to future proceeds of reinsurance policies. The purpose of
the section is to allow the liquidators to depart from the
statutory scheme because of current circumstances. By the time the
future proceeds are in hand, circumstance could have changed.
The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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