Australia: Drafting Reinsurance Clauses

Last Updated: 13 May 2009
Article by David Speiser and Geoffrey Lee

The recent New South Wales Court of Appeal decision in General Reinsurance Australia Ltd v HIH Casualty & General Insurance Ltd (in Liq) [2009] NSWCA 22 highlights the risk of adopting general and 'common industry' language when drafting reinsurance wordings.

The case considered whether payments made under a trade financial facility fell within a class of insurance described in a quota share reinsurance treaty as 'Trade Credit and Export Credit'. The New South Wales Court of Appeal held that it did, and rejected the reinsurer's argument that the common industry usage of such words contemplated a much narrower application. The decision provides another example of the Australian courts' call for greater precision and clarity in the drafting of reinsurance wordings.


From December 1997, Suncorp Metway Ltd (Suncorp) provided Daewoo Australia Pty Ltd (Daewoo Australia) with commercial funding under a trade finance facility. The facility was to be used for the purpose of ordering goods from third party suppliers. In November 1998, the parties agreed to a structure that required Suncorp to obtain 'trade credit' insurance as a form of security for its financial accommodation to Daewoo Australia. This arrangement was put into writing and signed on 29 March 1999 (Trade Finance Agreement).

The Trade Finance Agreement included the following terms:

  • When ordering goods from suppliers, Daewoo Australia would request that Suncorp be invoiced. Daewoo Australia would also request that Suncorp issue a letter of credit to the supplier for the purchase price.
  • Title in the goods would pass to Suncorp, once Suncorp paid the supplier. When Suncorp received an invoice from a supplier, it would invoice Daewoo Australia for the relevant goods at the amount of 111.12% of the purchase price stated in the supplier's invoice.
  • If Daewoo Australia paid each of Suncorp's invoices by their due date, Daewoo Australia was only required to pay the actual price paid by Suncorp to the supplier.
  • It was a condition precedent to the provision of facilities under the agreement that Suncorp have appropriate trade credit insurance for which Daewoo Australia would pay the premium.
  • Daewoo Australia would pay interest to Suncorp on each amount drawn down under a letter of credit, and all interest was payable in advance.

The price mark up was designed to provide Suncorp with indemnity for the full amount paid by it to the supplier if Daewoo Australia defaulted. Suncorp would derive all its revenue under this arrangement from interest charged and paid 'up front'. The relevant supplier in this case was Daewoo Australia's Hong Kong based subsidiary (Daewoo HK).

HIH Casualty & General Insurance Ltd (in liq) (HIH) undertook to insure Suncorp (Suncorp Policy) in full knowledge of the underlying structure of this arrangement. General Reinsurance Australia Ltd (Gen Re) subsequently provided a quota share reinsurance treaty (Treaty), but did so without an awareness of the underlying arrangement.

HIH made a claim under the Treaty for payments made to Suncorp. Gen Re denied cover on the basis that the claim did not fall within the class of insurance described in the Treaty as 'Trade Credit and Export Credit'.


Justice McDougall concluded that the Treaty responded to the claim as a 'Trade Credit' risk and was required to make payment to HIH under the policy. Gen Re subsequently appealed.


The issues on appeal were:

  • Whether the underlying primary insurance written by HIH was a 'Trade Credit' policy within the scope of the Treaty's class of business.
  • Whether Suncorp's claims fell within the terms of the policy issued by HIH.

Of particular importance was whether goods were 'delivered' for the purposes of the Suncorp policy whereby Suncorp did in fact take title to the relevant goods which was passed in a second sale transaction to Daewoo Australia. Transfer of legal title was crucial given that the goods were at no time under the physical control of Daewoo HK, Suncorp or Daewoo Australia.

Gen Re contended that:

  • The Trade Finance Agreement in reality did not involve a string of transactions from Daewoo HK (as supplier) to Suncorp and from Suncorp to Daewoo Australia. Gen Re submitted that Daewoo HK sold the goods directly to Daewoo Australia and that no title passed through Suncorp.
  • Relying on expert evidence, Gen Re argued that the Suncorp transaction should be characterised as involving a financial risk rather than trade credit risk. Gen Re claimed that Suncorp was not involved in the business of trading goods but was acting purely as a financier. The relevant activities therefore did not trigger the 'Trade Credit' risk described in the Treaty.


The Court of Appeal upheld Justice McDougall's decision.

Justice Allsop (with Justices Hodgson and Macfarlan agreeing) accepted HIH's expert evidence that the term 'Trade Credit' insurance was wide enough to cover the risk of non-payment of goods supplied by a financier on credit. His Honour stated:

'It accords with commercial common sense that the concept of "supply" includes delivery of title without the need for a financial institution to take and pass physical control to the buyer.'

Suncorp did not need to be a dealer in goods of the kind acquired by Daewoo Australia under the Trade Finance Agreement, nor did it need to carry on any trade by way of supply of goods generally.

What was crucial in this determination was the language contained in the invoice and Trade Finance Agreement. The invoice, was made out 'on account and at the risk of' Suncorp, and made no mention of the ultimate purchaser, Daewoo Australia, which together implied that Suncorp was the original applicant for the letter of credit. This was held to be persuasive evidence that the invoice was directed to Suncorp as the buyer and not merely as an agent.

The interpretation of the Trade Finance Agreement adopted by the Court reinforced that Suncorp became the purchaser of the goods once it submitted an unconditional letter of credit to Daewoo HK and Daewoo HK had in return invoiced Suncorp for those goods. The Court of Appeal concluded that at the time of payment this amounted to:

'...the creation of the legal relationship, at the request of Daewoo Australia, between what can be taken to be in commercial terms its supplier and its financier, with the clear commercial intention of on-sale to it by the financier.'

This transaction structure was ultimately characterised as falling within a 'Trade Credit' risk such as to bring Gen Re under an obligation to pay sums under the Treaty. The appeal was subsequently dismissed with costs.


The broad definition of 'Trade Credit' insurance adopted by the Court highlights the need for precision in drafting reinsurance policies. Reliance on undefined terminology and common industry usage, particularly where more than one interpretation is available, can be dangerous for both reinsurer and reinsured. In the current case, a protracted and expensive litigated dispute might have been avoided had the parties fleshed out in greater detail the meaning of 'Trade Credit'.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions