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 month. 

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 been made.

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 or compensation".

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, those moneys. 

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.