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Despite hopes for a Spring 2008 tabling of the bill effecting reforms to the Insurance Contracts Act 1984(Cth) (the Act), this may not occur until the beginning of 2009.
The exposure draft of the long awaited bill has been the subject of consideration and revision following the receipt of public submissions in March 2007 on the draft reform package that incorporated most of the recommendations provided by the Review Panel, appointed in 2003 to improve the overall operation of the Act.
The draft reform package was released in February 2007 and comprised a draft bill, draft regulations, explanatory materials and a draft regulation impact statement. In accordance with the findings of the Review Panel, the purpose of the proposed reforms is to update the Act, respond to market developments, clarify provisions in light of judicial interpretation and address anomalies in the operation of the Act.
A significant impact of the reforms proposed concerns interested third parties to an insurance policy. It is proposed that:
- a duty of good faith be imposed on insurers’ dealings with interested third parties
- the insurer and interested third parties will have to disclose matters that are likely to affect a decision to cover a risk and issues that may give rise to a claim on the policy
- an insurer has a right of subrogation with respect to payments it makes to interested third parties, and
- additional remedies are granted to an insurer for misrepresentation and non-disclosure.
Importantly, if these amendments are passed by Parliament, the existence of interested third parties could impact upon the premium charged for the policy if their inclusion alters the risk profile of the policy.
Significant changes are proposed in relation to “claims made” policies of insurance. (These usually include professional indemnity, D&O cover and similar policies.) The changes enable an insurer to decline a claim where there has been late notification of circumstances without the need to prove that they were prejudiced by the late notification. To offset this risk, an additional 28 days after the expiry of the policy period is granted for notifying facts that might give rise to a claim.
Important changes are also proposed in relation to remedies for non-disclosure and misrepresentation available for contracts of life insurance (death or contracts that contain a surrender value). The changes permit insurers to decline cover for a misrepresentation only where that misrepresentation would have affected their decision to enter the particular policy. The reforms will mean that Insurers will be able to recalculate the expiry date and premiums due if a date of birth has been incorrectly stated.
Some of the Review Panel’s suggestions, including updating the standard cover regulations and collection of data on claims by innocent co-insureds, are being progressed separately from the reform package.
Once passed, this Bill will affect all new insurance contracts and policy renewals bought in the Australian market and any primary insurance policies bought offshore. It may apply to variations, extensions or reinstatements.
Regardless of whether the bill is tabled in the Spring session or not until 2009, there is some indication that the government is aiming for a commencement date of 1 July 2009.
Author
Julie Walsh, Solicitor
In March 2008 the Australian Securities and Investments Commission (ASIC) released Regulatory Guide 126 (RG 126), which sets out how it will administer the requirement for Australian financial services licensees (AFS licensees) to have arrangements in place for compensating retail clients for losses suffered as a result of breach of the licensee’s obligations under the Corporations Act 2001 (Cth) (Corporations Act). These obligations are primarily complied with by obtaining professional indemnity (PI) insurance cover. Since the release of RG 126, some recurring issues with compliance with RG 126 have been identified.
Minimum PI policy requirements for the implementation period
Table 5 in RG 126 sets out the minimum policy features required of an AFS licensee’s PI insurance during the implementation period (1 January 2008 to 31 December 2009), including:
- The insurance must be provided by an insurer regulated by APRA or operating under an exemption under the Insurance Act 1973 (Cth).
- The minimum permissible indemnity limit for PI cover effected by an AFS licensee providing financial services to retail clients is $2 million. For AFS licensees that derive or expect to derive more than $2 million from the provision of financial services to retail clients the minimum cover must be approximately equal to the amount of revenue so derived, up to a maximum of $20 million. Revenue received by authorised representatives of the AFS licensee is to be included for the purposes of determining the minimum sum of cover.
- The excess/deductible on the policy must be at a level that the licensee can confidently sustain as an uninsured loss. AFS licensees should assess the financial resources required to cover the policy excess and any gaps in cover and retain records of this assessment.
- The policy must indemnify the AFS licensee against liability for loss or damage suffered by retail clients because of breaches of Chapter 7 of the Corporations Act by the licensee or its representatives (such as employees and directors).
However, AFS licensees should be aware that ASIC has emphasised that its minimum requirements are merely a guide, and compliance with such requirements does not necessarily mean that a licensee has complied with the requirements of the Corporations Act and Regulations. AFS licensees are required to maintain records of how they determined the amount of cover they deemed adequate.
Issues identified by Industry
The financial services industry has identified potential anomalies in the minimum requirements prescribed by RG126, such as:
- RG 126 requires an AFS licensee’s PI policy to include cover for fraud and dishonesty by directors, employees and other representatives. Cover for fraud is usually excluded under an AFS licensee’s PI policy, but obtained by a Crime extension to the policy. There is some debate about whether this would satisfy RG 126, because technically it requires cover for fraud and dishonesty to be provided under a PI policy (rather than through an alternative policy section)
- RG 126 requires an AFS licensee’s policy to cover external dispute resolution (EDR) scheme awards. A policy must not have the effect of excluding EDR scheme awards. Many AFS licensees are members of the Financial Ombudsman Service Limited - an EDR scheme which has jurisdiction over disputes in relation to members where the sum in issue is not more than $280,000. However, where a PI policy has an excess greater than $280,000, this has the effect of excluding EDR scheme awards notwithstanding that the scope of cover includes such liability.
AFS licensees and their brokers should be aware of these issues when effecting their PI cover. Clarification as to the requirements of RG 126 can be sought from ASIC if required.
Author
Luba Poukchanski, Solicitor
In June 2008, the Federal Government announced the introduction of a Financial Claims Scheme (FCS). The initiative is the Rudd Government’s response to recommendations by the Council of Financial Regulators, the HIH Royal Commission, and the global Financial Stability Forum in the wake of the collapse of the HIH group.
The stated aim of the FCS is to enhance the stability of the Australian financial system by providing depositors timely access to at least some of their funds in banks, credit unions and building societies, and compensation to general insurance policyholders who have valid claims in the event that a financial institution fails.
Upon collapse of a financial institution, the scheme will be funded by taxpayers’ contributions; that funding to later be recouped through the liquidation of the failed institution. This means that for the most part, the scheme should be self-funding. However in the event of a shortfall, surviving institutions will be levied. The FCS will be administered by APRA and activated by the Treasurer on the advice of APRA, the RBA and the Treasury. The precise circumstances when such a levy will apply to taxpayers and also to the relevant financial institutions, will be specified in legislation which establishes the scheme.
The Treasurer has noted that the risk of financial institutions failing is a very small one; however, reforms regulated by APRA would be put in place to minimise the likelihood of regulated financial institutions making a loss which is substantially bigger than its capital reserves or its capacity to replenish those reserves. The key reforms include:
- The regulation of non-operating holding companies (NOHCs) of prudentially regulated life insurers.
- Coordinating court injunction powers across prudential legislation so that either APRA or any other affected person can seek injunctions for conduct relating to the financial health of an institution.
- Arranging consistent transfers of business in banking, general and life insurance, with appropriate oversight by APRA.
- In the event of a failure, providing for the judicial management of a general insurer, overriding external management under the Corporations Act 2001 (Cth).
- Removing any potential legal barriers to allow for the recapitalisation of failing entities.
Eligibility for compensation is limited to individuals, small businesses and not-for-profit organisations. Investment products, such as superannuation, life insurance and managed funds will not be compensated.
The House of Lords decision in McGrath and others v Riddell and Another [2008] UKHL 21 was good news for Australian insureds as it gives priority to insurance and reinsurance creditors in respect of reinsurance recoveries which may now be remitted from the UK to Australia for purposes of distribution in accordance with the Australian insolvency regime.
Facts
Four HIH companies presented winding up petitions to the Supreme Court of NSW. Some of their assets, being reinsurance claims on reinsurance contracts underwritten in the London Market, were situated in England. Liquidators had been appointed in Australia and provisional liquidators were appointed in England. In 2005, a letter of request was sent by the New South Wales Supreme Court to the English High Court seeking a direction that the English provisional liquidators remit English assets to the liquidators in Australia for distribution.
Australian insolvency legislative regime
In broad terms, the Australian insolvency regime requires that:
- first, assets in Australia are to be applied to the discharge of debts payable in Australia although this would not include the English assets as these were not in Australia at the time the companies were wound up); and
- second, the proceeds from reinsurance policies should be applied towards the discharge of liabilities which were reinsured (see section 562A of the Corporations Act 2001 (Cth)) (Corporations Act).
In essence, insurance and reinsurance creditors are given priority in distribution over other creditors on insolvency of a company. This differed from the UK law in force at the time the provisional liquidators in England were appointed (which has since changed), whereby insurance creditors would not have been given priority, and the assets would have been distributed equally, without preference among the ordinary creditors.
Decision
The House of Lords overturned the decisions of the English High Court and Court of Appeal, and held that the assets could be remitted to Australia.
The decision largely turned on the application of section 426(4) of the UK Insolvency Act 1986 (Insolvency Act) which enables a court in the UK which has insolvency jurisdiction to assist courts in any relevant country that is designated under the Insolvency Act, including Australia. The Court also referred to section 426(5) of the Insolvency Act which provided that a court in any part of the UK, in exercising its discretion to provide assistance, was to consider rules of private international law, including the principle of “modified universalism”. This principle effectively requires courts in the UK, as far as is consistent with justice and UK public policy, to cooperate with Australian courts to ensure that all the assets are distributed under a single system of distribution.
The Court observed that a refusal to remit the assets might be appropriate if it causes “manifest injustice to a creditor”. It nevertheless formed the view that the operation of the Australian statutory scheme in its preferential treatment of insurance and reinsurance creditors was not “unacceptably discriminatory or otherwise contrary to public policy”.
Implications of decision
The decision shows that section 426 of the Insolvency Act affords a channel of remission of assets where a principal liquidation takes place in Australia and an ancillary liquidation takes place in the UK. The fact that under Australian law insurance and reinsurance creditors would be given priority to other creditors in respect of remitted reinsurance recoveries, is not a bar to remission, so long as the requirements of section 426 of the Insolvency Act are satisfied. The decision affirmed the principle of ‘modified universalism’ (subject to certain limitations) which is a fundamental part of cross-border insolvency law.
The House of Lords decision post-dates APRA’s response to submissions concerning refinement to the Australian general insurance prudential framework in which APRA stated that “in the event of the insolvency of an Australian insurer, there may be circumstances where the recoverables from its reinsurers are not readily accessible in Australia” (see Response to Submissions - Refinements to the General Insurance Prudential Framework, www.apra.gov.au, 19 December 2007, p 14), where the reinsurers are located in the UK. This concern has partly driven reforms to the treatment of reinsurance for capital adequacy purposes. However, there has been no indication from APRA that it intends to revise its treatment of UK reinsurance following the House of Lords decision.
In the current economic climate, this decision should bring some comfort to insureds that any reinsurance assets located in the UK will be remitted to Australia in the event of the insolvency of an insurer, to be applied to the benefit of insureds and reinsureds in accordance with section 562A of the Corporations Act. However, when placing large insurance programmes, insureds should also consider whether they require additional security over reinsurance recoverables, including (depending on the commercial viability of such measures) the benefit of cut-through clauses or charges over reinsurance recoverables.
Author
Max Cash, Senior Associate
The NSW Courts have recently provided some useful guidance on the operation of the proportionate liability provisions of the Civil Liability Act 2002 (NSW) (CLA) and in particular how liability is to be apportioned between concurrent wrongdoers. The following cases provide some useful guidance on the assessment of proportionate liability particularly in cases involving professional advisers. Whereas previously plaintiffs simply pursued professional advisers on the basis that they had the deepest pockets by virtue of their professional indemnity insurance (and left it to them to seek contributions from less solvent third parties), now plaintiffs must take steps to pursue all parties that contributed to their loss.
In general terms, the proportionate liability provisions of the CLA provide that in cases where two or more people have contributed to loss and damage (referred to as ‘concurrent wrongdoers’), their liability is limited to an amount reflective of their responsibility for such loss. Proportionate liability only applies to ‘apportionable claims’ which include tortious claims and breaches of fair trading provisions.
Proportionate liability represents a major change in the law. Previously a person was jointly and severally liable for damage caused and a plaintiff would pursue the defendant with the deepest pockets. It was up to that defendant to seek contributions from other parties. Following the CLA, a plaintiff should now pursue all parties who contributed to the damage. Should a plaintiff fail to do so, then they will only recover that loss to which the pursued defendants contributed.
One of the first cases in which proportionate liability was considered was Yates v Mobile Marine Repairs Pty Ltd [2007] NSWSC 1463. Palmer J provided the following useful guidance on the apportionment of responsibility between concurrent wrongdoers:
“The Court must exercise a large discretionary judgment founded upon the facts proved in each particular case. … it seems clear enough … that a wrongdoer who is, in a real and pragmatic sense, more to blame for the loss than another wrongdoer should bear more of the liability.”
Within six months of Yates, Young CJ (in eq) was providing further guidance on the issue in Vella v Permanent Mortgagees Pty Ltd [2008] NSWSC 505. The case involved a number of fraudulent property transactions undertaken, without Mr Vella’s knowledge, by his former business associate (C). C forged Vella’s signatures on a number of documents and those signatures had been ‘witnessed’ by a solicitor (F). The mortgage provider (MM) was unable to recover its monies from Vella and cross-claimed against their solicitors (H) essentially for failing to properly secure the loan.
During the course of a lengthy judgment, Young CJ (in eq) made the following comments on the approach to assessing each wrongdoer’s share of liability:
“The assessment of the percentages by which the loss or damage must be apportioned is, of necessity, a matter for judgment and is not a matter of scientific exactitude. … a judge “must make a comparison of the culpability and of the acts of the parties causing damage and, thus, to the relative blameworthiness and the relevant causal potency of the negligence of each party”.
His Honour found that C was the most culpable contributor to MM’s loss and hence was responsible for 72.5%. Whilst H was found to have breached their duty of care, they were only held liable for 12.5% of MM’s loss. F was only held responsible for 15% despite his involvement in witnessing C’s forged signatures.
In cases involving solicitors and fraud by another party, the courts seem to be taking the view that the blame to be attributed to the solicitor should be far less than the fraudster. Hoeben J assessed the solicitor’s liability at 10% in Ginelle Finance v Diakakis [2007] NSWSC 60 and Bryson AJ made a similar assessment in Chandra v Perpetual Trustees Victoria Ltd (2007) 13 BPR 24,675. Clearly the fraudster is more to blame than the solicitor and hence has made a greater contribution to the loss.
For professional negligence insurers, the relatively small liability attributed to professional advisors in cases involving fraud should be reassuring and detract from the apparent use by clients of professional services as providing ‘de facto insurance’ for risky transactions. Furthermore, with the current upheaval in credit markets, insurers should be keenly aware of the extent to which other parties might have contributed to loss and plaintiffs should be advised of such other parties as soon as practicable.
(Whilst the cases referred to above all concern the NSW CLA, given similar legislation in other jurisdictions, the cases provide useful guidance on how equivalent provisions might apply.)
Author
Travis Toemoe, Senior Associate
The recent decision of the High Court in CGU Insurance Ltd v Porthouse [2008] HCA 30 clarifies that the reference to “a reasonable person in the Insured’s professional position” in a ‘Known Circumstance’ exclusion excludes the insurer’s liability for claims arising out of facts or circumstances which a reasonable person would consider would give rise to a claim, even if the insured did not consider such facts or circumstances would give rise to a claim.
Background
In 2001, Mr Porthouse failed to advise his client that certain legislative amendments had the potential to preclude his claim against the State of New South Wales for damages if proceedings were not commenced by a certain time. In 2003, the District Court found that the amendments did not defeat the claim and the client was awarded damages. The State of New South Wales appealed the decision of the District Court.
Before the appeal was heard, Mr Porthouse completed a professional indemnity policy form with CGU. The policy excluded cover for claims arising from a ‘Known Circumstance’ . Section 11.12 defined ‘Known Circumstance’ as
- any fact, situation or circumstance which:
- an Insured knew before the policy began; or
- a reasonable person in the Insured’s professional position would have thought, before the policy began,
- might result in someone making an allegation against an Insured in respect of a liability, that might be covered by the policy.
The Court of Appeal overturned the decision of the District Court, holding that the amendments did preclude the client’s claim against the State of New South Wales, and the client successfully sued Mr Porthouse for negligence. CGU declined Mr Porthouse’s claim for an indemnity under the policy on the basis of the ‘Known Circumstance’ exclusion. Mr Porthouse commenced proceedings against CGU and succeeded at first instance and on appeal. CGU then appealed to the High Court.
Decision
At issue before the High Court was the interpretation and application of the ‘Known Circumstance’ exclusion.
The Court found that the phrase “a reasonable person in the Insured’s professional position” sets an objective standard, with the modification that the insured’s professional experience and knowledge of facts and circumstances are imputed to “a reasonable person in the Insured’s professional position.” The Court held that the exclusion required an enquiry about what a reasonable person “would have thought” as to the real (not remote or fanciful) possibility of an allegation being made.
The Court stated that when applying s.11.12(b) of the definition of ‘Known Circumstance’, it is not wrong to take into account what an insured thought as a piece of possibly relevant evidence, but the standard described is an objective standard and a question of fact to be determined independently of the insured’s state of mind.
The Court concluded that a reasonable barrister who knew of the potential effect on his client’s case of the legislative amendment and who knew of the pending appeal and of his role in creating his client’s possibility, “would have thought that there was a real possibility that an allegation might be made in respect of a liability which might be covered by the policy.”
The High Court held that CGU was entitled to rely on the ‘Known Circumstance’ exclusion.
Implications of decision
When determining whether a ‘Known Circumstance’ exclusion like that found in the CGU policy can be relied upon to deny a claim for indemnity, an insurer, therefore, need only establish that a reasonable person in the insured’s position would have thought, before the policy commenced, that a future claim against the insured was possible.
The decision of the High Court strengthens the extent to which ‘Known Circumstance’ exclusions safeguard insurers from indemnity claims arising from the prior conduct of insureds, even where the insured did not actually consider that such prior conduct could give rise to a future claim. It emphasises the need for insureds to evaluate their own conduct so that they are able to identify any potential claims and notify their insurers accordingly. It also confirms the value to insureds of ‘Continuous Cover’ clauses, which can effectively disapply prior claims or known circumstances exclusions, at least back to the date when the cover was first effected with the insurer.
Author
Kathryn Thornton, Solicitor
These proceedings arose out of the notorious Anzac Day 2006 rock fall at the Beaconsfield Gold mine in Tasmania, in which two miners were trapped below ground for five days and a third was killed. The court considered that a clause in the plaintiff’s Industrial Special Risks Policy (the Policy), purporting to extend cover for loss arising out of an order by a civil authority that activities at the mine cease, had to be interpreted in the context of the entire policy which only covered loss arising out of damage to the insured’s property.
Background
On the day of the rock fall, a Workcover Inspector had attended the mine and ordered that all mining activities at the site cease until further notice. Allstate Explorations (Allstate), a member of the joint venture that owned the mine, sought to claim under the Policy for losses arising from this business interruption. QBE denied cover on various grounds, but the main issue was the proper construction of clause 23 of the Policy.
Clause 23 relevantly provided that: the Insured was covered “against the risk of loss, destruction or damages arising from the actions of any civil authority during a conflagration or other catastrophe and for the purposes of preventing, minimising or retarding same and shall also include the closure of any Premises/operations by any civil authority due to the operation of a peril insured against.”
Allstate contended that the mine closure was an insured event which was “due to the operation of a peril insured against”. QBE claimed that clause 23 of the Policy was not engaged because there had been no property damage and the meaning and extent of clause 23 was to be read in context of the overall structural framework of the Policy.
Decision
The Victorian Court of Appeal noted that the Policy was to be given a business-like interpretation and that the Court should consider what reasonable people in the position of the parties would have understood the wording of clause 23 to mean by reference to the text of the Policy, the surrounding circumstances and object of the transaction. The words were to be interpreted in a common sense manner having regard to the whole text of the policy, so as to ensure that its components operated congruently.
The Court held that the correct interpretation of the Policy was that clause 23 was not engaged unless there was physical loss, destruction or damage to the Insured Property, placing weight on the fact that the Policy was divided into two sections; section 1 dealing with physical loss, destruction or damage to the Insured Property and section 2 dealing with loss arising from business interruption or interference due to physical loss, destruction or damage to the Insured Property. Therefore the fundamental structure of the policy was that of providing indemnity for two different kinds of losses, both of which depend on physical loss, destruction or damage to the Insured Property.
Allstate contended that clause 23 was intended to operate independently from the rest of the Policy as an additional source of indemnity. His Honour dismissed this argument on the basis that both sections 1 and 2 provided detailed and complex provisions referable to each insured event, such as provisions governing the basis of calculation for settlement of claims. Clause 23 contained no express provision for a basis of settlement and an intention by the parties that the basis of settlement should be supplied by the common law or by some unidentified modification of the provisions applicable to sections 1 and 2 was inconsistent with the otherwise specific and detailed provisions made in respect of claims settlement for each of sections 1 and 2. The absence of a claims settlement regime instead supported an inference that clause 23 was not intended to be a third and independent basis of claims.
Implications of decision
Pagone AJA commented that this case provided “an occasion to sound a caution to those adding clauses to pre-existing documents to ensure that their intentions take account of the structure into which additions are made to ensure, as much as possible, that ambiguities and uncertainties are avoided.”
When amending or adding clauses to insurance policies (particularly ‘boilerplate’ precedents), insurers, insureds and brokers should bear in mind the pre-existing content and structural framework of the document and ensure that any alteration fits comfortably within it. This will minimise the potential for ambiguities and anomalies that could later become the subject of dispute.
Authors
Dana Levi, Solicitor
Luba Poukchanski, Solicitor
In a recent Supreme Court of NSW case of Quintano v BW Rose Pty Limited & Ors [2008] NSW SC 793 Brereton J clarified the circumstances in which a matter is said to “arise from” an excluded claim.
Background
The plaintiff, Luke Quintano, sued the first defendant (BWR) for personal injuries sustained after being shot in the head at BWR’s nightclub. BWR’s public liability insurer, a Solomon Islands entity, went into liquidation shortly after the plaintiff’s claim. BWR sued its broker (Prestige) for negligently placing the insurance with an unregistered overseas insurer and failing to advise BWR of the risks.
As BWR itself went into liquidation before the conclusion of proceedings, it discontinued its claim against Prestige. Prestige, however, had incurred costs and expenses in defending the claim by BWR and sought to recover these from its PI insurer.
The case considers whether the PI insurer properly denied indemnity by relying on exclusions in respect of any Claim “arising from”:
- the insolvency of any insurer or reinsurer, or
- breach of a duty to advise on the suitability of an insurer.
Decision
Brereton J confirmed the words “arising from” require some causal connection between the claim and the specified matter, with the requisite nexus satisfied by a less proximate relationship than that required by the phrase “caused by” (as set out in the High Court case of GIO (NSW) v RJ Green & Lloyd Pty Limited). His Honour found that a claim can be said to “arise from” a matter if the matter is one of the underlying facts that, if they exist, together justify the claim.
Accordingly, even if BWR’s claim against Prestige did not explicitly refer to insolvency, and was later discontinued, as the gist of BWR’s claim was attributable to the insurer’s insolvency, the PI insurer could rely on the exclusion. His Honour went on to confirm the position of the authorities which have dealt with professional indemnity insurance:
“…the manner in which a claimant formulates its case against the insured cannot be decisive of the rights and liabilities of the parties of the insurance policy, for which purpose the claim is characterised by its underlying facts, and not the form in which the claimant propounds it. Thus, if the facts underlying the claim amount in substance to fraud, the circumstance that the claimant eschews fraud and pleads its case in negligence does not allow the insured to evade a fraud exclusion.” [at 9]
Implications of decision
The case makes clear a matter need only be one of the underlying facts to “arise from” an excluded claim. Further, His Honour confirms that the fact that an excluded claim is not specifically pleaded does not mean the exclusion does not apply.
In terms of His Honour’s comment regarding the application of a fraud exclusion, His Honour does not go so far as to say that an insurer can simply rely on the fact that the substance of the claim could amount to fraud in order to rely on a fraud exclusion. Rather, the point is that the failure to expressly plead “fraud” is not dispositive. Although, as His Honour points out in considering the exclusion relating to the failure to advise of suitability, much depends on the construction of an exclusion as to whether it is necessary to prove the claimant’s allegation before reliance can be placed on the exclusion.
To avoid such arguments, particularly in relation to fraud and dishonesty exclusions, there has been a development in directors and officers liability policies to specifically state that a wilful breach or fraudulent exclusion may not be relied upon by an insurer until the final adjudication of a court, or admission by the insured. Such a proviso is not commonly included in general liability or professional indemnity policies, although there is no legal reason why the same drafting could not also be applied in those contexts if the market sought such change. A “final adjudication” approach would reduce the circumstances in which an insured would be required to act as a prudent uninsured pending determination of fraud allegations.
Ann Newbrun recently chaired a panel discussion on the direct offshore foreign insurer (DOFI) regime at the Australian Professional Indemnity Group (APIG) National Conference. The panel was made up of a member of APRA, a broker and an insurer. Discussion revolved around how the new regime is working in these early days of its introduction.
Overview of the DOFI regime
From 1 July 2008, direct offshore foreign insurers may only sell insurance in Australia if that insurance falls within one of the following exemptions:
- high value insured exemption
- atypical risks exemption
- customised or broker exemption
- foreign law exemption.
The scope of carrying on insurance business in Australia has been clarified and expanded. If an insurer carries on insurance business in Australia that does not fall within an exemption, it must be authorised by the regulator, APRA.
Issues with the DOFI regime identified at APIG
Some challenging issues were identified at APIG:
- Care needs to taken when dealing with the London market to ensure that the underwriters are Lloyd’s who are already authorised, and do not include unauthorised insurers.
- Where a multinational corporation with global cover has a small operation in Australia that does not satisfy any of the thresholds in the high value insured exemption (alone or as part of a related group), does that operation have to be separately covered by an Australian authorised insurer?
- While not strictly an outcome of the new regime, APRA has introduced new capital charges for authorised insurers reinsuring with unauthorised reinsurers that do not establish security arrangements in Australia. This has resulted in a number of applications for authorisation from offshore reinsurers. It also restricts fronting insurance risks, that is, where a locally authorised insurer accepts insurance in Australia under an arrangement where it reinsures all or a significant percentage of the risk to an unauthorised foreign insurer.
- The treatment of blended products where a part of the cover is listed in the atypical risks exemption but another is not, for example, policies providing P&I cover and hull cover.
- Brokers have been provided with a framework for satisfying the customised or broker exemption but have essentially had to self regulate in developing compliance systems and criteria for satisfying that framework. The broker’s determination needs to be reasonable and based on a reasonable level of investigation and market analysis. An assessment of the exemption is to be made at the time of negotiation, inception, renewal or material change in the terms and conditions of the relevant policy. These present practical challenges.
- Analysis of data collected from brokers and other AFSL holders will be crucial to determining the efficacy of the performance of the new regime over time. However the regulations for data collection are still at the consultation stage. Treasury is intending to release draft forms and draft regulations for discussion shortly. The expected start date is 1 January 2009.
- According to APRA there is a change in terminology - DOFIs will now be referred to as “UFIs” - unauthorised foreign insurers.
Author
Ann Newbrun, Special Counsel
Ann Newbrun
Insurance expert Ann Newbrun joined the Sydney office as Special Counsel in April this year. Ann has significant experience in providing corporate, commercial and regulatory advice to the general insurance and reinsurance sectors, their intermediaries and industry bodies. This experience includes advising on acquisitions, portfolio transfers and the sale and distribution of insurance, including setting up distribution arrangements and promotional campaigns. Ann has also advised extensively on FSR issues, trade practices issues and compliance with insurance specific legislation.
Tania Noonan
In recognition of her seniority and special expertise in the insurance area, Tania Noonan has recently been promoted to the position of Special Counsel in the Sydney office of Mallesons Stephen Jaques. Tania joined Mallesons as a Summer Clerk in 1994 and advises insurers, companies and individuals in relation to:
- non-contentious insurance issues
- insurance disputes between insurers and insureds
- life and disability claims
- professional negligence claims
Tania’s appointment consolidates the top tier knowledge base and the high level of expertise in our insurance law practice.
We have recently added to our strong non-contentious insurance capabilities in Hong Kong, by adding a contentious capability, in particular by recruiting Angus Stuart who moved to us from CMS Cameron McKenna in Hong Kong.
Our Hong Kong office has extensive experience in handling and advising on all types of non-marine insurance claims as well as regulatory and compliance issues. The commercial litigation department has particular experience in Directors & Officers, Professional Indemnity, Fidelity, Contingency, Political Risk and Contractors All Risks cover across Asia and the UK.
Lawyers in our Hong Kong office have acted in relation to the following matters:
- claims arising out of the Licence Holders Insurance Scheme, a fidelity group scheme covering all licensed stockbrokers in Hong Kong and tracing and recovery of assets internationally
- expropriated oil rigs in Iran
- trade credit insurance in respect of the dishonouring of letters of credit
- insurance documentation for Rolling Stones world tours and 3 Tenors concerts
- litigation arising out of the cancellation of concerts forming part of the Michael Jackson HIStory tour
- concert cancellations in Asia
- claims made under film finance insurance
- accountants’ negligence and proceedings brought under the Companies Ordinance
- brokers’ negligence
- claims against architects and independent financial advisers.
- the collapse of a television transmitter mast in Saudi Arabia and subrogated recovery proceedings
- damage/interruption to a power station in Taiwan
- business interruption claims as a result of SARS
Our lawyers have also advised on regulatory matters, including in relation to transfers of business, setting up new branches of overseas insurance companies, and PRC insurance laws. Contact Stuart Valentine (+852 3443 1080) or Angus Stuart (+852 3443 1188) for further details.