Can the liquidator of an insurer avoid the requirement to
forward reinsurance payouts to the parties it has insured?
A recent NSW Supreme Court decision (re HIH Insurance
Limited  NSWSC 9) raises this tantalising
possibility - but leaves some vital issues hanging in the
HIH took out reinsurance as agent for its subsidiary
insurance companies. The premiums were paid by two of those
The HIH group went into liquidation. Under the terms of the
reinsurance contract, there was a deadline by which HIH had to
give notice if it wanted to commute the contract.
No notice was given by the deadline. Nevertheless,
HIH's liquidators and the reinsurer negotiated a
termination of the reinsurance. Under the termination
agreement, the reinsurer would pay a large sum of money to HIH
(in settlement of "all existing and potential
The liquidators wanted to distribute that money to the two
subsidiaries which had paid the premiums. Before giving the
go-ahead, the Court had to consider whether the payment was
subject to section 562A (ie. was directly payable to claimants
under insurance policies issued by the HIH subsidiaries).
Section 562A Did Not Apply
The Court said that section 562A did not apply.
It started from the proposition that only the two
subsidiaries which had paid the premiums were entitled to the
benefit of the payout. It then held that section 562A did not
apply to the payout, for two reasons:
There was no evidence that either subsidiary had incurred
a liability (under an insurance contract) that was covered by
The payout had not been received "under the contract
of reinsurance" (section 562A(1)(b)). It had been
received under a contract that was not the original contract
"the parties to the [reinsurance contract] simply
decided to put an end to it. Having negotiated terms upon
which the existing contract was to be terminated and releases
were to be given, they embodied those terms in a new contract
to which they then committed themselves. To the extent that
those terms entailed the payment and receipt of money, the
payment and receipt were `under' the new contract [as
opposed to the reinsurance contract]."
This decision must be treated with caution.
It appears to say that section 562A will not apply to a
payment received under an agreement to terminate a reinsurance
contract (because that payment is not contemplated by the
reinsurance contract itself).
The $64,000 (or, in this particular case, $214 million)
question then is: can section 562A be avoided simply by
terminating the reinsurance contract and negotiating a payment
under a separate termination contract?
One obvious stumbling block is the fact that the relevant
HIH subsidiaries did not have any insurance liabilities at the
time of the termination. It is far from certain that a court
would be willing to waive section 562A if the insurer was
facing claims at the time of termination of the reinsurance.
This could result in a broader judicial interpretation of what
constitutes a payment "under" a reinsurance contract.
On the other hand, a future court may take the view that this
is a bridge too far, and that the only way to rope in this type
of termination payment is by an amendment to section 562A
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
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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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