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Focus: Insured's entitlement to reinsurance recoveries of HIH entities

16 March 2011

In brief: Members of the former James Hardie Group insured by HIH have established their entitlement to payment of reinsurance recoveries held by the liquidators of HIH. Partner Dean Carrigan (view CV), Lawyer Larissa Chu and Law Graduate Alexander Edwards report.

How does it affect you?

  • This case concerns a claim for an order under section 562A(4) of the Corporations Act 2001 (Cth) in respect of reinsurance monies received by the liquidators of HIH.
  • It addresses grounds for the making of orders for the diversion to specific creditors (rather than the sharing between all creditors) of reinsurance recoveries.
  • It determines that orders cannot be made under s562A(4) in respect of future reinsurance recoveries.

Background

The case – Amaca Pty Ltd and Ors v McGrath & Anor as Liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 – arose in relation to claims made under insurance policies providing cover against liability for asbestos injury in the business carried on by Amaca Pty Ltd (formerly James Hardie & Coy Pty Ltd) and Amaba Pty Ltd (formerly Hardie-Ferado Pty Ltd) (the plaintiffs). This insurance was issued by HIH Underwriting and Insurance (Australia) Pty Ltd (HeathUI) and arranged by CE Heath Underwriting Agencies Australia Pty Ltd (Heath Australia).

Heath Australia placed insurance in the London market on behalf of the plaintiffs. In some instances, the plaintiffs were directly insured by London insurers. In others, HeathUI acted as insurer, but obtained facultative reinsurance from London reinsurers for the whole of its risk. HeathUI obtained no premium, although Heath Australia received a commission.

The plaintiffs sought recovery under the insurance policies as a result of asbestos claims made against them. Following the collapse of HIH, the liquidator of HeathUI held monies received from London reinsurers. As asbestos liabilities were expected to continue to eventuate in claims for many decades yet, the plaintiffs anticipated that the liquidator of HeathUI would, in future, receive additional monies from London reinsurers.

The plaintiffs sought orders that the liquidators be permitted and required to apply amounts received from London reinsurers exclusively towards the claims of the plaintiffs. The plaintiffs also sought similar orders in respect of future recoveries under relevant reinsurance agreements but not yet received by the liquidators.

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The decision

The application was made under s562A of the Corporations Act. That section applies relevantly where:

  1. a company is insured, under a contract of reinsurance entered into before the relevant date, against liability to pay amounts in respect of a relevant contract of insurance or relevant contracts of insurance; and
  2. an amount in respect of that liability has been or is received by the company or the liquidator under the contract of reinsurance.

Such amounts must normally be distributed pro rata by the liquidator to all creditors to whom an insurance debt is owed. However, s562A(4) grants the court a discretion to make an order that amounts received under a contract of reinsurance must be applied by the liquidator in some alternative manner, being a manner that the court considers just and reasonable in the circumstances. The plaintiffs' position was that, in the circumstances, it was just and equitable that the reinsurance recoveries held by the liquidators on behalf of HeathUI should be applied solely to their benefit, rather than applied pro rata to the relevant body of HIH creditors.

The plaintiffs argued that it would be unfair if the full benefit of the reinsurance recoveries were not paid to them, and submitted that the special circumstances of the case included that:

  • the James Hardie Group and its broker were active in assisting Heath Australia to obtain cover and was fully aware that all risk was being underwritten by the London market;
  • HeathUI was unable to insure the relevant risks itself under its existing treaty arrangements;
  • the relevant facultative reinsurance arrangements in favour of HeathUI were put in place for the clear and express purpose of providing cover for the plaintiffs; and
  • no premium passed to HeathUI, or, in the words of counsel for the plaintiff, Heath UI was 'paid nothing for doing nothing'.

In considering whether it would be 'just and equitable' to make the order sought by the plaintiffs, Justice Barrett construed the phrase broadly, allowing His Honour to take into account all of the circumstances as put before the court. These include, but are not limited to, factors set out in s562A(5). The court noted that these factors were not prerequisites for its jurisdiction. Further, despite the broad meaning of 'just and equitable; the court did not consider relevant the interests of the creditors of the plaintiffs (being asbestos claimants). The interests of the other insurance creditors of the defendants were relevant. It was found, however, that the reduction of the pro rata entitlement, which would, in the absence of the making of the order, have been available to the broader body of creditors, would be relatively minor.

On the facts, it was relevant that the reinsurance was provided for the direct purpose of ensuring HeathUI was able to issue the cover to the plaintiffs and was in fact the only way that cover could be provided. On that basis:

the reinsurance proceeds derived by HeathUI ought properly be regarded as part of what HeathUI, as insurer, was committed to provide to the plaintiffs upon and by reason of their sustaining the relevant loss.

The court therefore determined to grant the relief sought by the plaintiffs in relation to the sums actually received under reinsurance arrangements.

The court, however, determined that it could not grant relief in relation to reinsurance payments not yet received. The court held that, as a matter of construction, the inquiry required of the court under s562A(4) must be directed to an existing and established factual situation, so that the court can determine what is 'just and equitable' in respect of the particular amount received under a contract of reinsurance. So, the court determined that the ambit of s562A(4) was limited to assets currently held by liquidators and declined to make an order in relation to future reinsurance recoveries.

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Conclusion

This outcome was almost certainly not intended as a matter of policy. Therefore, it is anticipated that steps will be taken to amend the legislation in order to enable orders to be made with respect to future reinsurance assets coming into the hands of liquidators after the making of the court order as well as in relation to assets currently held by liquidators as at the date of the order.

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