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QBE Insurance (Australia) Limited v Lumley General Insurance Limited [2009] VSCA 124 (QBE v Lumley) and Limit (No 3) Limited v ACE Insurance Limited [2009] NSWSC 514 (Limit v ACE) have provided insurers with further insight into the operation and scope of the equitable remedy of equitable contribution for double insurance.
Particularly, the Courts confirmed that ordinarily it is the time of the event or casualty which triggers the insurance cover which is relevant in determining whether there is double insurance - and not the subsequent conduct of the parties or subsequent events. However, the possibility of double insurance where one insurer only is initially liable, and remains liable, for a risk, and subsequently, another insurer also becomes liable for the same risk, was left open in Limit v ACE. The Court also confirmed in Limit v ACE that an insurer cannot seek a 100% contribution ie indemnification, from another insurer for double insurance.
Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pty Ltd [2009] WASCA 31 (Speno v MMI) provided insight into the operation of ss 45(1) & (2) of the Insurance Contracts Act 1984 (Cth) (ICA). Among other things, it confirmed that s 45(1) is restricted in its operation to insurance contracts under which the relevant insured is a contracting insured.
Overview of cases
In QBE v Lumley, the sub-contractor, Commercial Interiors Australia Pty Ltd (Commercial Interiors), of the principal, Probuild Construction (Australia) Pty Ltd (Probuild) effected an insurance policy with QBE Insurance (Australia) Limited (QBE) (QBE policy).
The QBE policy extended protection to principals of Commercial Interiors ie as non-contracting insureds. Probuild effected an insurance policy with Lumley General Insurance Limited (Lumley) (Lumley policy). The Lumley policy extended protection to sub-contractors of Probuild ie as non-contracting insureds.
QBE appealed the trial Judge’s decision that there was double insurance, and that accordingly, QBE was required to contribute 50% to Lumley for rectification costs that Lumley had paid out to Probuild in connection with damages to certain contract works of which Probuild was head contractor, which were actually occasioned by the negligence of Commercial Interiors.
QBE submitted that Commercial Interiors was not insured under the Lumley policy because it had not taken any steps to authorise or ratify its inclusion as an insured under that policy. It was submitted that a third party to whom an insurance contract extends protection and who has direct rights of enforcement under s 48 of the ICA and the common law (under the principles in Trident General Insurance Co Ltd v McNiece [1988] HCA 44 (Trident)) must take steps to “engage” the insurance contract. The Court rejected this argument.
It was held that there is nothing in Trident or the wording of s 48 of the ICA, which requires a third party to whom an insurance contract, upon its terms, extends protection to do anything as a pre-condition to enforcing the rights conferred by s 48 of the ICA or Trident.
QBE also submitted that it was necessary for Commercial Interiors to actually claim under the Lumley policy in order for double insurance to exist, and that as Commercial Interiors had made no claim, Lumley had no liability to it. As a related point, QBE submitted there was no evidence that Probuild had any authority from Commercial Interiors to notify Lumley on its behalf. (Probuild’s broker had notified Lumley of the damage to the contract works.)
These arguments were rejected on two alternative grounds.
- First, by determining that contribution was available according to the principles in AMP Workers Compensation Services (NSW) Ltd v QBE Insurance Ltd [2001] NSWCA 267 (AMP v QBE) (with slight modifications). The Court held that double insurance (and hence rights of contribution) requires coordinate liability at the time of the event which triggers the insurance contracts viz “insuring clause event” (as distinct from the “time of casualty” test espoused in AMP v QBE), and that subsequent events, including subsequent actions of the insured parties, will generally not be relevant, unless such events or actions would subvert, rather than promote, the underlying rationale and purpose of the contribution principles - essentially, to avoid unjust enrichment.
- Secondly, by concluding that Commercial Interiors had a direct right to indemnification under the Lumley policy as a result of the application of s 48 of the ICA and Trident.
Finally, QBE submitted that Lumley had paid the claim on behalf of Probuild and not Commercial Interiors - something which it was not obliged to do on the specific facts by reason of an exclusion within the Lumley policy (namely, for liabilities arising under contract and not otherwise).
This argument was rejected as, on the facts, the payment under the Lumley policy indemnified, and was on behalf of, Commercial Interiors who was the only insured entitled to cover under the policy in respect of the relevant casualty event. Probuild received payment of the indemnity amount as the person performing the relevant rectification works in respect of the protection provided by the policy to Commercial Interiors as an insured.
In Limit v ACE the court (without consideration of any limitations of this test, as discussed in QBE v Lumley, [67]-[69]) followed the “time of casualty” test adopted in AMP v QBE, and reiterated that the relevant time to assess whether there is joint insurance is at the time of the casualty. In this case, at the time of casualty only one insurer (ACE) was immediately liable - the other was only contingently liable - and accordingly, there was no double insurance.
The Court left open the possibility of double insurance where one insurer is liable, and remains liable, for a risk, and subsequently, another insurer also becomes liable for the same risk. The Court further held that a party seeking contribution cannot seek 100% of the amount they paid out to the insured, as this would be inconsistent with the underlying principles and rationales of the doctrine. Such a claim would best be sought by recoupment.
s 45(1) ICA and double insurance
To limit their exposure under an insurance contract, an insurer may include a clause in the contract which upon its terms has the effect of making the insurance contract excess of other available insurance by excluding liability where, or to the extent, another insurance contract/s also responds to a loss or liability of an insured otherwise protected under the contract (and thus avoid the potential for double insurance).
Section 45(1) of the ICA provides that:
(1) Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.
By s 45(2) of the ICA, s 45(1) does not apply to “true’ excess policies.
Section 45 has been interpreted recently by the WA Court of Appeal in Speno v MMI. In Speno v MMI, the contractor (Speno) was insured by Zurich Australian Insurance Ltd (Zurich) (Zurich policy), and the principal for whom Speno was providing services - Hammersley Iron Pty Ltd (Hammersley) - was separately insured by Metals & Minerals Insurance Pty Ltd (MMI) (MMI policy). The Zurich policy extended protection to Hammersley (as principal) as well.
The issue before the Court was whether MMI was liable to pay contribution to Zurich for an amount Zurich paid out on behalf of Hammersley under the Zurich policy in respect of liabilities Hammersley incurred to an employee of Speno.
The Court considered the validity of an “underlying insurance” clause in the MMI policy that, upon its terms, operated to render the MMI policy an excess policy where other insurance also responded to a claim for which indemnity was otherwise available under the MMI policy. The relevant provision included in its ambit both insurance policies effected by the insured, ie to which it was “party”, and also insurance policies effected by other parties benefiting the insured, ie to which it was not “party”. To the extent that the clause included in its ambit insurance contracts effected by the insured ie to which it was a “party”, the clause was determined to breach s 45(1) and to be void.
The Court held that s 45(1) of the ICA voided a provision only to the extent that it has the effect stipulated in s 45(1). Further, the Court held that s 45(1) did not evince an intention to exclude severance - such that if a clause in an insurance contract only partially offended s 45(1) and severance of the offending part/s was not impossible, only the offending part/s of the clause were voided. The Court held that in relation to the specific clause the parts that offended s 45(1) could be severed, leaving the remainder of the clause valid. The result was that the clause validly operated in relation to insurance policies effected by third parties that extended protection to the insured as a beneficiary, as follows:
Underwriters acknowledge that it is customary for the Insured to effect or for other parties (including joint venture partners, contractors and the like) to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk.
In the event of the Insured being indemnified under such other Insurance effected by or on behalf of the Insured (not being an Insurance specifically effected as Insurance excess of this Policy) in respect of a Claim for which Indemnity is available under this Policy, such other Insurance hereinafter referred to as Underlying Insurance, the Insurance afforded by this Policy shall be Excess Insurance over the applicable Limit of Indemnity of the Underlying Insurance but subject always to the terms and conditions of this Policy.
As modified, the clause continued to include the Zurich policy in its ambit. Its effect was to preclude double insurance arising as the MMI policy was rendered excess of the Zurich policy. On this basis Zurich’s action for contribution failed. In light of this decision, under a contractor controlled insurance programme (or in reverse a principal controlled insurance programme), the principal’s insurer (or vice versa the contractor’s) may effectively provide its insurance is non-contributing and other insurance arranged by the contractor (or vice versa the principal) is primary in relation to any claim that may be insured under both the principal’s and contractor’s policies.
Finally, the Court in Speno v MMI rejected the submission that s 45(1) does not void a clause which converts a policy into excess cover where other insurance is available to an insured unless and until the clause’s effect is to limit or exclude an actual liability for an insured event because the insured has “entered into” another insurance contract. The Court determined that s 45(1) renders such a provision void where the effect of that clause is to limit or exclude the scope of the insurer’s liability on the ground that, before or after entering into the insurance contract, the insured enters into another insurance contract.
s 45(2) and Double Compensation
As noted the general rule in s 45(1) does not apply in the case of ‘true’ excess insurance that satisfies the criteria of s 45(2). Section 45(2) provides that:
(2) Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first-mentioned contract.
The focus to date in cases concerned with the construction of s 45(2) has been on the meaning and application of the word “specified”. In Speno v MMI the Court held that in order for an excess policy to be “specified” for the purposes of s 45(2), the “specification must contain sufficient information to enable the identification of a specific primary policy to which the excess policy is intended to be secondary”. The Court rejected the submission that what is sufficient specification should be determined so as to reflect the parties’ intentions, having regard to the surrounding circumstances and context. It held that the primary focus of the question is on the language and policy of the legislation, and not the intentions of the parties.
Further, the Court emphasised that the fact that it may be difficult or impossible for greater specificity to be given in an exclusion clause is not a ground for watering down the statutory requirement of specification: “if the other insurance is not sufficiently specifically identified, the policy will not be a true excess policy”. Accordingly, it was held that the phrase “such other insurance” in the clause in the MMI policy did not meet the specificity requirement of s 45(2). What provided double insurance as between the Zurich Policy and the MMI policy was the fact that the general rule in s45(1) was not enlivened to void the underlying insurance clause in the MMI policy rather than the saving operation of s 45(2). An application for special leave to appeal to the High Court was sought. Special leave has been approved.
In another case, HIH Casualty & General Insurance Ltd v Pluim Constructions Pty Ltd [2000] NSWCA 281, Mason P noted by way of obiter comment that the contract of insurance need not actually be formed and/or commenced before it is capable of being specified per s 45(2). Particularly, “it is possible that a clearly defined class of insurance such as “X’s standard Construction Policy with an excess of Y” would suffice”.
Authors
Philip Ward, Partner
Jocelyn Williams, Law Graduate
There has, of late, been a noticeable increase in applications by plaintiffs and prospective plaintiffs for access to companies insurance policies. The approach taken by the courts to such applications is of interest to both insurers and policy holders alike as many commercial insurance policies include a clause to the effect that the contents of the insurance policy must be kept confidential and not disclosed to third parties.
In our last edition, we referred to the then recent Federal Court decision in Merim Pty Ltd v Style Limited in which a shareholder sought and obtained access to D&O insurance policies. The question of third party access to corporate insurance policies has recently been the subject of further judicial consideration in Lehman Brothers v Wingecarribee SC [2009] FCAFC 63.
Background Facts
Wingecarribee Shire Council (Wingecarribee SC) had invested in collaterised debt obligations (CDO) through Lehman Brothers. These investments lost significant value in 2007 as a result of the US sub-prime crisis. The substantive losses suffered by Wingecarribee SC resulted in it suing Lehman Brothers in late 2007 for misleading and deceptive conduct.
As is well known, Lehman Brothers subsequently collapsed in September 2008 and a voluntary administrator was appointed to its Australian operations. The administrators recommended in the report to creditors that Lehman Brothers enter into a Deed of Company Arrangement (DOCA). The proposed DOCA relevantly provided that any monies recovered from insurers would be available to only a particular class of creditors, and that claims against Lehman Brothers and its directors and officers by all other creditors bound by the deed would be extinguished.
Wingecarribee SC did not know whether it fell within the class of creditors entitled to the insurance proceeds as the details of these insurance policies were not specified in the report to creditors, nor were the polices disclosed by the administrators. Wingecarribee SC therefore sought an order that the administrators disclose the insurance policies referred to in the report to creditors. At first instance access was granted to those policies under s 23 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act). s 23 of the Federal Court Act relevantly allows a court to require a respondent to produce evidence of its asset position in circumstances where there is an apprehended or antecedent abuse of process.
Appeal to the Full Federal Court
Lehman Brothers appealed to the Full Federal Court . The issue to be determined was whether the proposed DOCA would constitute an abuse of process under s 23 of the Federal Court Act, if its effect, if passed, was to abrogate the rights of the Council against Lehman Brothers. The Full Court held there was no abuse of process merely because the proposed DOCA, if passed, may abrogate Wingecarribee SC’s rights against Lehman Brothers.
Wingecarribee SC submitted that the abuse of process was the administrator’s failure to provide details of insurance policies to creditors. The Court held that to determine whether this constituted an abuse of process, the Council had to establish, first, a link (a rational connection) between this conduct and the feared deleterious impact upon the proceedings, and secondly, that the disclosure of the disputed information is in fact a solution to the identified abuse of process.
The Full Court determined that there was nothing to indicate that the alleged absence of sufficient information would have had any likely impact on the outcome of the creditors’ decision on the proposed DOCA. Accordingly, the Full Court held that there was no connection between providing the relevant insurance policies and the prevention of the termination of the proceedings if the DOCA were passed.
Comment
This decision is reassuring for both insurers and policy holders alike. It reinforces that disclosure of a defendant’s insurance arrangements will not be ordered simply to assist the plaintiff in determining whether to commence or to continue litigation. The decision also reinforces the point that the Court will not exercise its discretion lightly when deciding whether to order disclosure of insurance policies.
An application to court seeking disclosure of insurance policies is likely to have implications for policy holders given commercial insurance contracts generally include a clause requiring the contents of the insurance policy to be kept confidential and not disclosed to third parties. Faced with such an application, policy holders may be required to advise their insurers although this will turn on the facts of each case, the terms of the policy in question and the policy holder’s statutory duty of good faith to their insurers.
Authors
Travis Toemoe, Senior Associate
Jocelyn Williams, Law Graduate
With recent economic events seeing a spate of failures of investment schemes and adverse impacts on investment returns, there has been an increase in claims by investors seeking to recover such losses from their financial advisors.
As it is a requirement (in the absence of an available exemption) for persons carrying on a financial services business in Australia to hold an Australian Financial Services Licence (“AFSL”) which in turn relevantly requires the AFSL holder to effect professional indemnity insurance, a recent NSW Court of Appeal decision in Zhang v Minox Securities Pty Ltd [2009] NSWCA 182 provides useful guidance on the application of a common exclusion clause in professional indemnity insurance policies which operates by reference to “approved product lists”.
Background
QBE insured Quantum and its authorised representatives under a composite professional indemnity policy and a financial institutions policy. Mr Chan was an authorised representative of Quantum and in that capacity procured investments in the failed Westpoint group. This investment was not on Quantum’s “approved product list”.
The investors sued Quantum for their loss and applied to join QBE as Quantum’s insurer. To be successful in that application required the court to be satisfied, among other things, that there was an arguable case the insured was entitled to be indemnified.
QBE successfully opposed the investors application at first instance on the basis that exclusion clauses meant that neither the professional indemnity policy nor the financial institutions policy responded. The investors appealed.
The Court of Appeal’s decision
The Court of Appeal agreed that an exclusion clause in the financial institutions policy meant that the professional indemnity policy, not the financial institutions policy, covered financial planning claims. That left the professional indemnity policy. The Court of Appeal’s decision is of interest because of the finding on the following clause which relevantly excluded cover for:-
“any financial or investment product that … is not listed on the Approved Product List of the entity which has issued the Insured with a proper authority to deal in financial products”.
The Court decided that whilst this exclusion meant the policy did not respond to a claim brought against Chan, the position was different for Quantum. The Court held that it is common in composite policies covering a number of insureds for exclusion clauses operate distributively so as to deny cover to one insured but not to another. It was accepted that the purpose of the exclusion was to deny cover to authorised representatives acting outside their authority (such as Chan), “but not to deny cover to innocent employers such as Quantum”. Indeed, Hodgson JA said that it was non-sensical to suggest that Quantum could have issued an Approved Product List to itself.
The Court therefore concluded that the exclusion had no application to Quantum as the entity issuing the Approved Product List and a separate Insured such that the investors were able to join QBE.
Implications
Many professional indemnity policies held by AFSL licence holders contain a similarly drafted exclusion. This decision has the potential to lead to an uplift in the number of claims seen by insurers and financial service providers arising out of investments in products not on approved product lists.
This decision also reinforces, to both insurers and insureds, that the terms of exclusion clauses in policies covering two or more insureds need to be carefully drafted. In particular, the insureds such clauses are intended to encompass should be made evident by clear drafting.
Authors
Travis Toemoe, Senior Associate
Duncan Campbell, Solicitor
The General Insurance Code of Practice (Code) is a voluntary set of standards which insurers agree to uphold. It requires an insurer to be open, fair and honest with its customers and it sets out minimum standards for (amongst other things): selling insurance, customer service, financial hardship, claims management, complaints handling and catastrophe and disaster response. Operation of the Code is monitored by the Financial Ombudsman Service (FOS).
The Code Compliance Committee of the FOS monitors Code compliance through reports received from the FOS, provides an external dispute resolution framework and makes determinations and imposes sanctions where the FOS has reported a failure by a Code signatory to correct a Code breach.
All members of the Insurance Council of Australia (ICA) must be signatories to the Code and currently 90% of the industry’s general insurance providers are signatories. The Code was first developed and introduced by the ICA in 1994. The 1994 version of the Code (Old Code) applied to contracts of insurance for domestic/consumer clients, with some limited application to insurance for small businesses. Types of insurances covered by the Old Code included:
- motor vehicle insurance
- home building insurance
- home contents insurance
- sickness and accident insurance
- consumer credit insurance
- travel insurance, and
- personal and domestic property insurance.
Scope and application of the Code
The Old Code was revised in 2005 and commenced operation in its revised form in July 2006. A major difference between the current Code and the Old Code is that the current Code removes a distinction between consumer/retail clients and corporate clients. The Code now extends to insured businesses as well as insured individuals.
The Code applies to all general insurance products except:
- workers compensation
- marine insurance
- reinsurance
- medical indemnity insurance
- compulsory third party insurance, and
- health insurance.
The Code does not apply to life insurance products.
Review of the Code
The terms of the Code require the Code to be reviewed every three years by an independent reviewer. The current review of the Code commenced on 1 June 2009. Under the terms of reference, the review will assess whether the Code:
- promotes better, more informed relations between insurers and their customers;
- improves consumer confidence in the general insurance industry;
- provides better mechanisms for the resolution of complaints and disputes between insurers and their customers; and
- commits insurers and the professionals they rely upon to higher standards of customer service.
The General Insurance Code of Practice Review has now received written submissions. The next step of public consultation commenced on 27 July 2009 in all capital cities, regional Victoria and far north Queensland. Interested parties may register to attend consultation sessions to discuss written submissions by made them with an independent reviewer.
The majority of submissions acknowledge that the Code has been successful in promoting high standards of professional and ethical behaviour within the general insurance industry. However, several issues have been identified as requiring reform, including:
A distinction between individual and corporate clients
The broad ambit of the Code captures corporate insurances such as Industrial Special Risks (ISR) policies. One submission from a global insurer requested the reintroduction of a distinction between a consumer/retail client and a corporate client stating that the Code has limited application to corporate policies because:
- corporate buyers of such insurance products do not typically ‘apply’ for insurance, rather they tender for insurance through brokers acting on their behalf;
- references to financial hardship in the Code target individual consumers and do not realistically apply to large corporate clients;
- large commercial or corporate disputes are outside the terms of reference of the external dispute resolution framework (EDR) provided by the FOS;
- the broad application of the Code places unnecessary compliance burdens on insurers serving the commercial market which do not result in a benefit to the FOS, the corporate client or the insurer.
Consistency between the Code and the FOS Terms of Reference
Many insurers identified inconsistency between the Code and the FOS Terms of Reference, for example in relation to dispute handling. It was submitted that the Code should be amended to reflect that claimants should report to the FOS only where the FOS has the jurisdiction to hear the dispute.
Exclusion of professional indemnity insurance
It was submitted that professional indemnity insurance (including medical indemnity insurance) should be excluded from the ambit of the Code. This class of insurance is already excluded from the FOS Terms of Reference. Furthermore, the types of complaints and disputes which arise in relation to this class of insurance do not readily lend themselves to the complaints procedures which apply to other types of general insurance.
Other comments
Other responses requested consideration of:
- incorporating a definition of ‘complaint’ and ‘dispute’
- using interpreters when communicating with people from non-English speaking backgrounds, in relation to the purchase of insurance and debt recovery
- strengthening the hardship provisions
- making adoption of the Code mandatory, and
- establishing standards for loss adjustors.
Author
Julie Walsh, Solicitor
Unauthorised foreign insurers
In Australia, direct offshore foreign insurers (now referred to as unauthorised foreign insurers (UFI)) who carry on “insurance business” in Australia are required to be authorised by the local prudential regulator, the Australian Prudential Regulation Authority (APRA) and thus become subject to Australia’s prudential supervisory regime. This requirement was designed to ensure that Australian policyholders have the security of Australia’s strong prudential regime for general insurers.
Commencing on 1 July 2008, the scope of conduct that could be carrying on “insurance business” for the purposes of the local authorisation requirement was clarified and expanded. This has had significant implications for the way general insurance is transacted in Australia where UFIs are involved, based around the availability, or otherwise, of one (or more) of the four listed exemptions to the definition of “insurance business”.
One question that arises is this: what effect does this re-calibration of the local authorisation requirement have on difference in conditions (DIC) and difference in limits (DIL) cover provided by global insurance programmes?
Who carries on “insurance business” in Australia?
“Insurance business” is defined by section 3 of the Insurance Act 1973 (Cth) (Insurance Act) to mean the:
“business of undertaking liability by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, and includes any business incidental to insurance business as so defined…”.
In the construction of this definition, s 3(5) expands upon the rider in the definition namely, “business incidental to insurance business as so defined”. A business of a person is taken to be within the ambit of this rider to the extent one or more of the following kinds of acts are engaged in:
- inducing others to enter into insurance contracts with that person as an insurer, and
- publishing or distributing a statement relating to a person’s willingness to enter into a contract (or procuring the publication or distribution of such a statement).
The notion of carrying on “insurance business” in Australia is expressly provided to include in its ambit (ss 3(5) to (7)):
- a business carried on outside Australia by a person (“offshore person”) that would constitute insurance business if carried on in Australia, and
- where another person in Australia acts directly or indirectly through broker/s or other representative/s on behalf of that offshore person in relation to the insurance business carried on offshore.
Acts directed at inducing others to enter into insurance contracts or advertising and other marketing and promotional activities, will fall within the expanded concept of “insurance business”, and, if done outside of Australia will be taken to occur in Australia to the extent that they have, or are likely to have, an effect in Australia.
There is scant case law on the application of this phrase. Much will depend upon the extent of pre-contractual “inducing” conduct involved and the contractual nexus between the insurer and the Australian insured. Depending on the facts and circumstances, if such acts have an “effect in Australia” then the UFI will be prohibited from providing the insurance unless it is also a locally authorised insurer or an exemption applies.
Global Policies
Multinational companies often arrange global insurance programmes with UFIs which provide DIC or DIL cover to fill gaps in coverage that may exist on a local level. DIC cover provides “in fill” cover to that provided by local insurance policies, for example coverage for risks that are excluded. DIL cover provides additional cover above the sums insured or the policy limits or sub-limits in the local insurance policies. These global insurance programmes allow risk managers to ensure consistent insurance cover for the multi-national companies across different countries.
However with the expanded definition of carrying on “insurance business”, UFIs which provide global insurance programmes to Australian companies may now come within the ambit of the local authorisation requirement. That is because acts done by UFIs to induce companies to obtain global insurance policies, even if done outside Australia, will be taken to occur in Australia if they have an effect in Australia. Careful consideration of the conduct involved in arranging cover and the contractual nexus between the insurer and the Australian insured will be required to determine whether or not the local authorisation requirement is enlivened.
Further, stand alone DIC or DIL policies which directly insure an Australian insured will be caught within Australia’s prudential regime unless an exemption applies.
UFIs who provide global insurance programmes that include entities in Australia should consider whether they need to obtain APRA authorisation or whether an exemption applies to the insurance business they provide.
Exemptions
UFIs are not required to be authorised if the insurance business they conduct falls within one of the four listed exemptions:
- high value insured exemption
- atypical risks exemption
- customised or broker exemption
- foreign law exemption.
For further details on these exemptions, please see our previous alert.
Authors
Philip Ward, Partner
Ann Newbrun, Special Counsel
Mandy Tsang, Solicitor
A takaful market in Australia?
The Muslim population in Australia is growing and with that must come an increased demand for Shariah-compliant financial products, particularly as the comparatively larger younger groups within the Muslim population reach an age where they should start purchasing insurance. This view is confirmed by the recent announcement by a major Australian bank that it is intending to enter the Islamic finance market by offering Muslim friendly banking products and this suggests that there may also be a market in Australia for Shariah-compliant insurance - takaful. The 2006 Census reported that there were approximately 340,000 people (around 1.6% of the population) who identified Islam as their religion. The Australian Bureau of Statistics reports that since 1986, Australia has experienced remarkable growth with the number of Islam affiliates increasing 3 fold. In particular, the number of Islamic Australians in the 20-39 age group is approximately 123,800 as at 2006 (2.3% of that age group).
Takaful is not available in Australia. This lack of available Shariah-compliant insurance means that some Muslims may be uninsured because conventional insurance conflicts with core beliefs. Many Shariah scholars state that Muslims have a religious obligation to purchase takaful over conventional insurance.
Businesses could also benefit from the availability of takaful and, given Australia’s robust prudential and regulatory regimes, takaful sourced from Australia may be attractive to overseas companies. Furthermore, non-Muslims may also prefer takaful over conventional insurance due to the combination of mutuality and ethical investments.
In this article, we look at the characteristics of takaful and its difference from conventional insurance. We also consider the issues that may arise for a takaful provider seeking to obtain authorisation from APRA to offer takaful in Australia.
Authors
Ann Newbrun, Special Counsel
Julie Walsh, Solicitor
Sarah Awad, Law Clerk
In Lexington Insurance Company Limited v Wasa International Insurance Company [2009] UKHL 40, the House of Lords has clarified the way in which “back to back” reinsurance policies should be approached to be consistent with the underlying policy. Further, “full reinsurance” and “follow the settlements” clauses in general do not have the effect of bringing within cover risks that would not otherwise be covered by it.
Facts
Lexington Insurance Company (Lexington) insured Aluminium Company of America (Alcoa) against property damage for the period 1 July 1977 to 1 July 1980 (the Insurance Policy). Lexington arranged facultative reinsurance with a number of reinsurers including Wasa International Insurance Company (Wasa) and AGF Insurance Ltd (AGF).
The reinsurance slip was in materially the same terms as the Insurance Policy (the Reinsurance Policy). However, whilst the Insurance Policy contained a standard US Service of Suit clause (and the policy was governed by the law of the place of suit), it was accepted by both parties that the Reinsurance Policy was governed by English law.
The Supreme Court of Washington
In 2002, the Supreme Court of Washington held that, under the law of Pennsylvania, Lexington were liable under the Insurance Policy to pay for substantial clean up costs incurred by Alcoa in respect of pollution that had taken place between 1942 and 1986. The period of cover did not limit the extent of the recoverable loss. The court held that provided that there was some damage during the three year period, Alcoa had a right to indemnity for all liability flowing from the damage, whenever it occurred.
In 2003, Lexington paid Alcoa US$103 million in settlement of an even larger potential liability flowing from the decision of the Supreme Court of Washington.
The High Court and the Court of Appeal
Wasa and AGF commenced proceedings in London seeking a declaration that they were not obliged to indemnify Lexington in respect of its settlement with Alcoa.
At first instance, Simon J held that the Reinsurance Policy was governed by English law. He found that under English law, it is clear that a contract providing cover for loss and damage occurring during a specified three year period could not be construed as covering additional damage occurring before or after that period. The Court of Appeal overturned this judgment. Pill, Sedley and Longmore JJ found that the parties intended the definition of the period of cover in the Insurance Policy and the Reinsurance Policy to have the same meaning - namely the meaning ascribed to it by the Supreme Court of Washington.
The House of Lords
The House of Lords handed down its much anticipated judgment on 30 July 2009. The House of Lords concurred with the judgment of Simon J at first instance.
The Lords accepted that the normal commercial purpose of proportional facultative reinsurance policies is to provide “back to back” cover of the underlying policy. As such, the relevant terms of the reinsurance policy should be construed to be consistent with the underlying policy. However, the Lords held that where the contracts are governed by different law, then it remains a question of construction as to what risk is assumed. There are no special conflict of laws rules that govern the consequences of any inconsistency.
The Lords observed that when the Insurance and Reinsurance Policies were concluded there was no “identifiable system of law applicable to the policies that would have provided a basis for construing the reinsurance contract in a manner different from its ordinary meaning in the London insurance market”. As such, the Reinsurance Policy was determined to be governed by English law. Both parties agreed that under English law the Reinsurance Policy only covered losses that occurred within the period of cover (and not pre-existing loss or damage). The Lords emphasised the “fundamental” importance of the temporal scope of the policy under English law.
The Lords noted further that the “full reinsurance” clause in this case and “follow the settlements” clauses in general do not have the effect of bringing within the cover of a policy of reinsurance risks that would not otherwise be covered by it.
What should parties do now?
Parties seeking clarity around their rights or exposure should:
- not blindly rely on “full reinsurance” and “follow the settlements” clauses
- check whether insurance and reinsurance contracts are subject to the same “identifiable and predictable” governing law
- consider including a clause in the reinsurance contract that expressly binds reinsurers to agree that the law applying to the primary cover will also apply to the reinsurance.
Authors
Max Cash, Senior Associate
Amy Richardson, Solicitor
In Kirby v Centro Properties Limited (2009) FCA 695 (26 June 2009), the Federal Court considered whether a claimant is entitled to access insurance policies of a defendant when a mediation is ordered.
Background
In May 2008, a “shareholder” class action was brought in the Federal Court on behalf of holders of securities claiming damages against the Centro Properties Group and the Centro Retail Trust (together, Centro). The claim alleges that Centro engaged in misleading and deceptive conduct and breached its continuous disclosure obligations. An order was made in December last year referring the claim to mediation.
Motion for production of insurance policies
In March 2009, the applicant brought a motion for production of Centro’s insurance policies, arguing that knowledge of the contents was necessary for its effective participation in the mediation. Underlying this was doubts raised by the applicant about whether the damages sought by the applicant would be recoverable from Centro’s own resources.
The applicant submitted three bases on which disclosure should be made:
- the insurance policies related to a matter in question in the proceedings;
- a mediation conducted without knowledge of Centro’s cover (if any) would not produce an outcome which could properly be the subject of an application for approval under the Federal Court of Australia Act 1976 (Cth) (Act). (Section 33V of the Act requires court approval of the settlement of representative proceedings.); and
- a mediation conducted without the knowledge of Centro’s cover would not be consistent with the principles underlying case management.
Insurance policies did not relate to a matter in question in the proceedings
The court confirmed the general rule that the insurance cover of a defendant will normally be irrelevant to any cause of action pleaded against that defendant. The underlying justification for this rule is “shielding juries from the temptation to effect redistributive justice”.
The perceived financial frailty of Centro was not relevant to a cause of action invoked in the proceedings.
Court cannot compel disclosure in aid of mediation
The court then considered whether, if insurance cover is irrelevant to a cause of action, disclosure could be compelled in aid of mediation of those proceedings.
Ryan J did not accept that a lack of knowledge of the insurance cover held by Centro would:
- preclude the applicant’s advisers from forming an opinion on the reasonableness of any proposed outcome of negotiations in a mediation, or for the court to make a determination as to whether the settlement was fair, reasonable and adequate in the interests of the group members as a whole, or
- mean that the mediation would be “hollow” or inconsistent with the principles which the court has developed for the mediation or case management of disputes like the present.
His Honour also noted that, were the court to order disclosure of the insurance policies, the effect would be that the applicant would know from the outset the maximum extent of the financial capacity of Centro to contribute to any settlement. This knowledge would result in a prejudice to Centro and an “asymmetry” in the respective bargaining powers of the parties.
His Honour concluded that it was not within the power or discretion of the court to compel disclosure of Centro’s insurance cover, and declined to do so.
Wingecarribee v Lehman Brothers
Kirby v Centro may be contrasted with the recent Federal Court decision which granted (at first instance only) Wingecarribee Council access to Lehman Brothers’ insurance policies. For a detailed discussion of this decision and the appeal to the Full Federal Court, click here. The circumstances of that case were significantly different in that the Council was arguing that a proposed Deed of Company Arrangement would constitute an abuse of process because it would, if passed, abrogate the rights of the Council against Lehman Brothers.
Key points to take away
- Courts are generally reluctant to compel disclosure of insurance policies where they do not relate to a matter in question.
- The capacity of a defendant to satisfy a judgement does not relate to a matter in question.
- The significance of insurance policies in negotiations or mediation is a matter for commercial judgement or strategy of parties, which the courts will not intrude upon.
Author
Wilson Antoon, Solicitor
As discussed in our previous alert, under the National Consumer Credit Protection Bill 2009 (Cth) (Bill) a licensee must have adequate arrangements for compensating persons for loss or damage suffered because of a contravention of the Bill by the licensee or its representatives. Under the exposure draft of the National Consumer Credit Protection (National Credit Code) Regulations 2009 (Regulations), licensees must hold professional indemnity insurance cover that is adequate in order to satisfy the Bills’s adequate compensation arrangement requirements.
The Regulations exempt from the compensation arrangement requirements general insurance companies, life insurance companies and ADIs regulated by APRA. Companies that have an ASIC-approved guarantee from a related APRA-regulated entity are also exempt.
Adequate professional indemnity insurance
ASIC has published a consultation paper on its proposed policy for compensation and financial resources arrangements of licensees (Consultation Paper). The Consultation Paper which can be accessed here. The Consultation Paper offers guidelines as to what professional indemnity insurance (PI insurance) would be considered adequate. As anticipated, the regime draws upon, and is similar to, ASIC Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126).
Differences
The main difference between the requirements in RG 126 and the compensation arrangements for credit licensees is that for lenders there will be no specific minimum amount of PI insurance cover they must hold. Instead, lenders will be expected to:
- analyse the circumstances in which their credit activities could expose them to an obligation to compensate a consumer beyond merely reducing the size of the consumer’s loan, and
- obtain PI insurance cover sufficient to meet that exposure.
In the Consultation Paper, ASIC sought suggestions as to how lenders and non-lenders should be defined.
The policy consideration behind this difference to RG 126 is the recognition of the differences in consumer protection considerations applicable between credit licensees and AFS licensees.
Similarities
Elements of RG 126 that are proposed to be carried across for credit licensees are:
- the key features of an adequate PI insurance policy
- for non-lenders (that do not otherwise provide credit), the requirement to hold a minimum amount of PI insurance cover, and
- the approach to the alternative arrangements regime, where credit licensees can apply to ASIC for approval of a non-PI insurance based compensation arrangement.
Insurers will need to consider the same issues as they did for RG 126 but now in the context of credit licensees.
Continuing concerns
Unfortunately the Consultation Paper does not shed light on problems identified with RG 126 and continues the uncertainty. These have been identified in a previous insurance alert and include requirements for:
- cover for fraud and dishonesty by directors, employees and other representatives, and
- cover for external dispute resolution scheme awards.
What’s next?
Comments on the Consultation Paper have closed. The drafting of the final regulatory guide is expected to finish in October 2009 with its release expected in November 2009.
The Bill (together with related legislation) has been referred to the Senate Economics Legislation Committee with its report due by 7 September 2009. Submissions on the draft exposure Regulations are due on 9 September 2009.
The timetable for the implementation of the Bill can be found in our alert from 25 June 2009. Changes to this timetable are discussed in our alert dated 14 August 2009. These changes do not affect the timetable for meeting the requirements for compensation arrangements.
Author
Mandy Tsang, Solicitor
Overview
In Chief Commissioner of State Revenue v Qantas Airways Ltd [2009] NSWCA 163, the New South Wales Court of Appeal confirmed that entities which have placed insurance with an insurer that is not a “general insurer” under the Insurance Act 1973 (Cth) (Insurance Act) may be entitled to a refund of insurance duty paid in NSW for a certain limited period.
The entitlement to a refund is available to an insured if the insurer with whom cover was effected was not a “general insurer” before 20 June 2006. Such insurers include unauthorised foreign insurers (UFIs) and Lloyd’s underwriters.
When was insurance duty imposed?
Prior to 20 June 2006, under s 229(1) of the Duties Act 1997 (NSW) (the Act), insurance duty was imposed on the amount of premium paid in relation to a contract of insurance that effects general insurance. Section 236 of the Act requires “a person who obtains, effects or renews any general insurance as an insured person with a person who is not a registered insurer” to lodge a return with, and to pay the relevant duty to, the Chief Commissioner.
Definition of insurer
General insurance was defined as any kind of insurance, other than life insurance, in respect of New South Wales property or risks. The case focused on the meaning of insurer within the definition of “premium”. Premium was defined in s 231(1) as the “total consideration given to an insurer by or on behalf of the insured person to effect insurance…”
Under s 247 of the Act, an insurer was defined as one who was “registered as a general insurer under the Commonwealth Insurance Act 1973”. In the Dictionary of the Act, an “insurer” had the meaning given to it by s 247.
It was common ground that if the definition of insurer in s 247 applied to the definition of premium, then consideration paid to an insurer who was not registered as a general insurer under the Insurance Act would not come within the definition of “premium”. Therefore, no insurance duty can be imposed under s 229 and the insured was not liable to pay the insurance duty under s 236.
It was also common ground that the insurers with whom Qantas Airways Ltd (Qantas) effected general insurance were not authorised or registered as general insurers under the Insurance Act.
Issue on appeal
The issue on appeal was whether the Dictionary definition of “insurer” was inapplicable to Chapter 8 Part 1 of the Act which contained the relevant provisions. The Chief Commissioner contended that following s 6 of the Interpretation Act (NSW) 1987, the definition should not apply to the construction of the relevant provisions of the Act because a contrary intention was disclosed by s 236(1) and 236(2) as understood in the light of the structure and history of the legislation imposing insurance duty. These matters were argued to justify wider meanings to the words “premium” and “insurer’ in s 236 which would bring within the tax base premiums paid to insurers who were not registered or authorised under the Insurance Act.
At the Supreme Court, Handley AJ rejected these contentions following a consideration of the principles of statutory interpretation.
Court of Appeal decision
The Court of Appeal affirmed Handley AJ’s decision and reasoning. Macfarlan JA (with whom Ipp and Campbell JJA agreed) held that “I do not consider that the Act manifested any intention that the definition not apply to the particular provision under consideration, such as would attract the operation of s 6 of the Interpretation Act 1997”.
The Chief Commissioner of State Revenue’s assessment was revoked and the duty under the assessment was ordered to be refunded with interest. This amount was approximately $5 million.
What this means?
Following this decision, insureds may be eligible for a refund of duties from the NSW Office of State Revenue if such was paid before 20 June 2006. The interpretation and application set out above do not apply after 19 June 2006 as the relevant provisions were amended with effect from 20 June 2006. Additionally, it is only possible to lodge a request for a reassessment or refund for duty paid in the five years before the date of lodging the request.
As such, insureds and underwriters should consider taking the following steps:
- consider whether you placed insurance with a UFI or Lloyd’s underwriter during the period commencing 5 years prior to the date of lodgement of a request for refund of duty and ending on 19 June 2006 (for example, if a request for refund was to be made on the last day of this month (August 2009), the period 31 August 2004 to 19 June 2006) and if so, whether you remitted any insurance duty payable in respect of premiums on behalf of insureds. (Remember that the UFI must not have been authorised by APRA at the time of placing the insurance.)
- identify the affected insureds and their brokers,
- contact the brokers or if no broker was involved (or is no longer involved), contact the insured direct and discuss whether to seek a refund (or take any other action such as an objection to an assessment) and if so, agree who will do this and at whose expense,
- alternatively, if you are considering a bulk application, obtain the consents of insureds or brokers acting on their behalf.
Author
Mandy Tsang, Solicitor
The case of Aon Risk Services Australia Limited v Australian National University [2009] HCA 27 considered when a party is entitled to amend its case before or during a trial. ANU sued three insurers in 2004 in the ACT Supreme Court. Aon was joined in mid 2005. ANU settled with the insurers on the third day of a four week trial in 2006. It then sought an adjournment and leave to amend its claim to allege a “substantially different” case against AON. This amendment effectively recommenced the litigation.
The primary judge granted leave to amend on the basis that ANU sought to raise “real triable issues” and given the decision in JL Holdings. The decision was upheld 2-1 in the ACT Court of Appeal on similar grounds, but has now been overturned 7 – 0 on appeal in the High Court.
Previously, per JL Holdings, consideration of case management principles or of the proper use of court resources were discounted or given little weight in relation to a court’s exercise of its discretion to amend pleadings (or to allow the taking of another step in a proceeding) out of time or in breach of court directions. Rather, the paramount consideration was “justice as between the parties”. A litigant could essentially disregard case management principles and amend its claim at any stage. This position is now overturned.
Following Aon v ANU there are now limits on a party’s entitlement to amend its case just before or during trial. In any such application, the courts will consider:
- the principles of case management
- the public interest, including the proper use of the court’s time and resources
- whether there has been “undue delay”, and the existence of a satisfactory explanation for any delay
- the interests of justice, including that “the interests of justice” refers not only to the interests of the applicant, but also to those of the respondent and to other litigants in the court system, and
- that costs, including indemnity costs, are not a cure-all for the prejudice a respondent may suffer in such situations.
The courts do retain the discretion allowed by various court procedure rules to allow a party to amend its case or to take a step out of time, and a punitive response to a late application for amendment will not be appropriate.
Although Aon v ANU dealt with an application for leave to amend pleadings made during trial, the references in the judgment to the case management principles enshrined in the states’ court procedure rules indicate that this decision will apply whenever a court is asked to allow the taking of a step in a proceeding which is out of time, or not in keeping with existing court directions.
The practical effect of the decision is that courts may often refuse leave to amend or to take steps out of time, to enforce directions hearing timetables. Lawyers must be more vigilant in keeping themselves (and counsel) to statutory and court imposed deadlines.
Authors
Justin McDonnell, Partner
Robert True, Solicitor
Prime Minister Kevin Rudd released the Final Report of the National Health and Hospitals Reform Commission (NHHRC) on 27 July 2009.
The Federal Government will use the recommendations in the Report as a basis for consulting with the health sector and the Australian public and will then convene a special COAG meeting with the States and Territories in late 2009, explicitly on health and hospitals reform. Final decisions for the reform plan will be made after consideration of the Final Report of the Australia's Future Tax System Review Panel (Henry Report) and the next Intergenerational Report, both due at the end of this year. The Commonwealth will then put forward a reform plan at a further COAG meeting in early 2010.
Health system reform will hold implications and present opportunities for the private health insurance industry. It will be crucial that the industry participate in the discussions and later, in the development and implementation of the Government’s health reform plan.
The day after the Final Report was released, the 8th Annual Health Insurance Summit commenced where the recommendations of the Final Report were considered. Here are some observations:
Medicare Select
Partly in recognition of the high level of uptake of private health insurance in Australia, the social health insurance scheme proposed in the NHHRC Interim Report (see our previous article for a discussion of social insurance) has been replaced with a new model based on the establishment of health and hospital plans. All Australians would automatically belong to a government operated health and hospital plan, but could select to move to another plan, which could be operated by a not-for-profit or private enterprise. Health and hospital plans would receive funds from the Commonwealth Government on a risk-adjusted basis for each person and be required to cover a prescribed set of services - a universal service obligation. People could take their universal service entitlements under ‘Medicare Select’ to their plan. It is expected that in purchasing services to meet the health care needs of their members, plans would take a longer term view and purchase services focussing on health needs over time.
According to the Report, people could purchase from private health insurers additional coverage not included under the universal service obligation (such as for extended allied health coverage, advanced dental care, enhanced hospital amenity and access). The NHHRC recommends that, over the next two years, the Commonwealth Government commits to exploring the design, benefits, risks and feasibility of implementing health and hospital plans. Issues requiring detailed examination are listed in the recommendations and include:
- 90.7 The potential role of private health insurance alongside health and hospital plans (including defining how private health insurance would complement health and hospital plans, the potential impact on membership, premiums, insurance products and the viability of existing private health insurance; and any changes to the Commonwealth Government’s regulatory, policy or financial support for private health insurance);
- 90.11 The necessary regulatory framework to support the establishment and operation of health and hospital plans (including issues relating to entry and exit of plans, minimum standards for the establishment of plans, any requirements relating to whether plans are able to also provide health services, and the potential separation of health and hospital plans and existing private health insurance products).
This raises the fundamental question of what will be the role of private health insurance? What will be the scope for new private health insurance products and other products such as medical savings accounts? What will be the cost impact for private health insurers?
Denticare Australia
A new universal scheme for access to basic dental services funded by raising the Medicare Levy by 0.75% of taxable income. About 45% of Australians already have private health insurance for dental care. They would not be asked to pay twice under Denticare Australia. Instead, those taking out insurance for the basic dental services would have their premiums paid for by Denticare Australia. Or Denticare Australia would pay the costs for people using public dental services.
Issues raised at the 8th Annual Health Insurance Summit included: If basic dental care is taken out of the private health insurance realm, will the price of private health insurance increase? Will the uptake of auxiliary services fall? Could this result in lower profits for private health insurers? Will the Australian public accept an increase in taxes in the current economic environment? What sort of products can private health insurers develop around the proposal?
Reshaping the Medicare Benefits Schedule
In reviewing the scope of services under Medicare, the NHHRC confirms the benefits of mixed public-private financing and recommends that the overall balance of spending through tax, private health insurance and co-payments be maintained over the next decade. However, the mix of public and private financing for particular types of services may change.
This raises the question: What are the implications of changes to the Medicare tables for private health insurance products and their pricing?
The NHHRC Report provides numerous other recommendations including:
- establishing a National Aboriginal and Torres Strait Islander Health Authority
- establishing a National Health Promotion and Prevention Agency
- implementing a National Action Plan on E-health
- developing Healthy Australia Goals 2020
- calling for heads of government to agree to a Healthy Australia Accord articulating the roles and responsibilities of all governments in improving health services and outcomes.
These are bold and forward thinking recommendations and there will no doubt be debate both for and against implementing them and also surrounding how they should be implemented. This has been described as the biggest overhaul of the health system in 20 years. It will be critical that all stakeholders, including those in the private health insurance industry, become deeply involved in the development of the reform.
Author
Ann Newbrun, Special Counsel
The Administrative Measures for the Transfer of State-owned Assets in Financial Enterprises (the Measures) were issued by China’s Ministry of Finance (MOF) on 18 March 2009. These Measures come into effect on 1 May 2009.
Background
Prior to the issuance of these Measures, it was not entirely clear from regulations on the transfer of State-owned assets whether or not the approval of MOF is required for the transfer of State-owned interests in Chinese financial enterprises such as insurance companies, and whether it was necessary for the transfer to be conducted by way of a public sale process through a “property rights exchange”. These Measures clarify the situation by providing that all such transfers must be conducted either through a property rights exchange or a stock exchange (if the shares are listed), otherwise special approval by MOF or the State Council is required for the transfer to be effected by way of private agreement, and that will only be available in limited cases.
Some highlights of the Measures are set out below:
Application of the Measures
These Measures apply to the transfer of any interests arising from investment in financial enterprises by all levels of government or government authorised investors to domestic or foreign legal or natural persons or other organisations.
"Financial enterprises" are defined in the Measures as enterprises that hold a “financial business licence” and financial holding companies. It is not specified in the Measures whether or not financial enterprises include insurance companies. However in the Interim Measures for Management of the Title Registration of State-Owned Assets in Financial Enterprises issued by the State Assets Supervisory and Administration Commission (“SASAC”), a financial enterprise is defined to include an insurance company.
Permitted Methods of Transfer
The Measure provide that there are three permitted methods of transferring State-owned equity interests in financial enterprises:
- through a property rights exchange - for transfer of Stated-owned equity interests not listed on a stock exchange;
- through a stock exchange - for transfer of listed Stated-owned shares; and
- by agreement - only available in very limited circumstances.
Approval Authorities
MOF and its local branches are the principal approval authorities for transferring State-owned equity interests in financial enterprises. In the event that additional approvals from other regulators are required, an application for approval of the transfer must also be submitted to such other regulators. However, the Measures are silent as to the manner in which MOF will coordinate with other regulators such as CIRC and SASAC in relation to the approval procedures.
Transfer through a property rights exchange
The procedures involved in transfer through a property rights exchange set out in the Measures are similar to those under other relevant regulations.
Valuation
Prior to the listing of the property rights on a property exchange, the seller must engage an asset valuation institution to obtain the valuation of the target company as a whole, and submit, along with other required documentation, the valuation amount for approval.
The listing price for the property rights on offer for the first public auction should be no less than the abovementioned valuation amount.
Public sale process - publicly advertised sale to the highest bidder that meets specific conditions
No bidder: Where there is no registered bidder for the first public sale, the seller may determine a new listing price and initiate a second round of public sale. The new listing price must be submitted for approval if it is lower than 90% of the initial valuation amount.
One bidder: Where there is only one registered bidder, the seller and the bidder may negotiate the terms of sale and sign an equity transfer agreement, provided that the transfer price agreed under this agreement is no less than the listing price of the property rights.
More than one bidder: Where there are more than one registered bidder, the sell of equity must be conducted by way of auction, bid and tender and other forms of competitive bidding.
Seller may define the range of bidders
The Measures provide that, subject to compliance with regulatory requirements and satisfaction of fair competition principle, the seller may specify conditions that must be satisfied by a potential purchaser. These conditions could include such matters as qualification, business reputation, industry entry standards, scale of assets, business operation, financial situation and management capacity.
Payment of purchase price
The Measures provide that the total purchase price for the sale of the equity should, in principle, be paid in a lump sum. However, if the purchase price is a “large sum” (which is not defined), then it may be paid in instalments provided that i) the initial payment should not be less than 30% of the total purchase price and should be paid within 5 working days from when the equity transfer agreement takes effect; ii) a guarantee for the balance of the unpaid purchase price should be provided and interest at the bank loan interest rate be paid on the unpaid portion of the purchase price; and iii) the total purchase price must be paid within 12 months from the date that the equity transfer agreement takes effect.
The Measures further provide that the price should, in principle, be paid in cash. A valuation is required to determine the value of any consideration paid not in the form of cash.
Transfer by Agreement
According to the Measures, an agreement to transfer (ie. transfer of the State-owned equity interest without going through the public sale process) is only available in limited circumstances and is subject to approval by the State Council, MOF or its local branches:
- where there are special qualification requirements for the transferee under the law;
- where the transfer is for an assets restructuring of the holding (group) company; or
- for other “special reasons”.
The purchase price must be no less than the valuation amount determined by the valuation process and approved by the MOF.
In addition, an agreement to transfer shares in a listed company is subject to meeting additional requirements for listed companies.
Transfer through a Stock Exchange
Transfer of Stated-owned shares in a listed financial enterprise and transfer of State-owned shares in a listed company by a financial enterprise must go through a stock exchange.
Author
Stuart Valentine, Partner
On 15 July 2009 China published the Measures for Calculating the Turnover of Financial Sector Undertakings for Notification of Concentrations (“Measures”), which took effect on 15 August 2009. The Measures were jointly issued by the Ministry of Commerce (“MOFCOM”), the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission. The Measures specify how to calculate “turnover” for the purpose of applying the notification thresholds for mergers in the financial sector under the Anti-Monopoly Law (AML).
China’s Anti-Monopoly Law (AML) came into effect on 1 August 2008 (please see our previous client alert for an overall introduction of the AML). Under the new merger control regime set out in the AML, transactions that meet specified turnover thresholds must be notified to, and cannot be closed until they are cleared by, MOFCOM. On 3 August 2008, the State Council published the Rules on Notification Thresholds. These specify the turnover thresholds which trigger the mandatory notification requirements (please see our client alert for an introduction of the notification thresholds). However, the Rules on Notification Thresholds do not provide guidance in relation to the calculation of turnover thresholds for the financial industry, such as for banks, insurers, securities and futures companies. This issue has now been addressed in the Measures.
The Measures explain: (a) which undertakings are deemed as “financial sector undertakings” and therefore governed by the Measures; and (b) for those undertakings deemed to be financial sector undertakings, what turnover is taken into account to determine whether the merger control thresholds are met.
The Measures cover the following types of financial institutions, as well as the types of income that should be taken into account in calculating turnover for the purpose of applying the notification thresholds:
Company |
Turnover elements |
Insurance companies |
Premium income |
|
(including commercial banks, asset management companies, trust companies, finance companies, and currency brokerage firms) |
Net interest income |
Net fee and commission income | |
Investment income | |
Profit arising from changes in fair value | |
Exchange rates | |
Other operating income | |
Securities companies |
Net fee and commission incomes (including those from brokerage business, asset management business, underwriting and sponsoring business and financial consultancy business etc.) |
Net interest income | |
Investment income | |
Exchange rate gains | |
Other operating income | |
Futures companies |
Net fee and commission income |
Net interest income from bank deposits | |
Fund management companies |
Management fee income |
Fee income |
Insurance companies’ turnover is deemed to arise solely from premium income under the Measures. The formulae for calculating insurance companies’ turnover are as follows:
- turnover = (premium income - business tax and associated charges) x 10%, and
- premium income = premium incomes under original insurance policies + reinsurance premium inpayments - reinsurance premium outpayments.
The turnover of the other financial institutions listed above is calculated on the basis of the following formula:
Turnover = (aggregate of turnover elements - business tax and associated charges) x 10%
The approach set out in the Measures differs from that taken in the European Union and a number of practical issues are yet to be resolved. These include how the turnover of portfolio companies of financial institutions should be calculated and whether turnover should be attributed to the location of the relevant branch or to the countries where the firm’s clients are located.
Authors
Martyn Huckerby, Partner
Stuart Valentine, Partner
Since the mid-1990’s, China has prohibited its banks form investing in Chinese insurance companies, but there has been considerable pressure from the banks to reverse this policy to enable them to better compete with foreign banks which have been investing in China’s insurance as well as banking sectors.
It was reported in June this year that the China Banking Regulatory Commission (CBRC) had granted its approval in principle to Chinese banks taking up stakes in two Sino-foreign joint venture life insurance companies as “pilot investments” by banks in insurance companies. The China Insurance Regulatory Commission (CIRC) had earlier indicated its approval in principle for this development, which represents a significant step towards the participation of China’s banks in the domestic insurance industry.
Such a development has been welcomed by international insurers that have been looking to partner with Chinese banks in joint venture insurance companies, as they see the potential benefits in the distribution of insurance products that Chinese banks could bring with their extensive branch networks.
Chinese banks have been hoping to invest in the insurance industry for many years and the big banks (including the Bank of China) have previously submitted applications to establish insurance companies in China, but none of them have been approved. It was not until December 2007 when China’s State Council issued a policy to approve, in principle, commercial banks’ investment into the established insurance companies on a pilot base that the legal and regulatory basis for Chinese banks’ investment into insurance companies was established. In January 2008, the CBRC and CIRC jointly published a Memorandum of Understanding on Strengthening In-depth Co-operation and Regulatory Co-operation between Banking and Insurance Industries, under which the two regulators agreed on a basic framework for investment, including entry qualifications, approval procedures, regulatory oversight and risk management. Since then, many banks have submitted applications for approval. However, according to the State’s Council’s policy, as a pilot program only a small number of banks will be permitted to invest into insurance companies and, at this stage, it is reported that only four state-controlled banks (Bank of Communications, Bank of Beijing, China Construction Bank and Industrial and Commercial Bank of China) have been selected.
It has also been reported that the CBRC and CIRC are working together on measures to govern investment by commercial banks’ into insurance companies, which are likely to impose a maximum percentage ownership of banks in insurance companies.
Many Chinese and foreign-invested insurers are very wary of the potential implications of this significant policy change. The insurers are concerned that the banks, especially the large state-owned banks, have extensive distribution networks by virtue of their branch networks, and that the banks may give preference to distributing the products of their investee insurance companies through such branch networks, restricting access to and disadvantaging insurance companies that do not have bank shareholders.
However, it should be noted that China’s Anti-Monopoly Law (which came into effect on 1 August 2008) may restrict banks from giving preference to the distribution of products of their own investee insurance companies to those of other insurance companies. Under the Anti-Monopoly Law, an exclusive sales arrangement between an insurance company and its bank shareholder may be struck down as an anti-competitive agreement, and other anti-competitive conduct, particularly by the larger banks, may be challenged for abuse of a dominant market position.
Authors
Stuart Valentine, Partner
Symone Bates, Senior Associate
Katherine Lian, Registered Foreign Lawyer
Protection for whistleblowers of private health insurers
The Private Health Insurance Administration Council (PHIAC) implemented on 16 July 2009 a formal process for whistleblowers to report the misconduct or potential misconduct of a private health insurer. Misconduct that may be reported includes:
- failure to comply with legal requirements and prudential standards
- corrupt or fraudulent activity
- substantial mismanagement
- dishonest or unethical behaviour by an individual within the organisation, that would, if proven, constitute a criminal offence or warrant regulatory action.
PHIAC will consider and investigate any information that is brought to its attention that relates to an insurer’s prudential obligations or the operations of a health benefits fund. This includes the conduct of the insurer, the fund or its staff members. In handling this information, the whistleblowers process requires PHIAC to comply with any applicable laws and practices relating to the protection of whistleblowers.
More information on whistleblowers can be found at PHIAC’s website: http://www.phiac.gov.au/whistleblowers/
Author
Julie Walsh, Solicitor
Revised draft governance standards for private health insurers
The Private Health Insurance Administration Council (PHIAC) has released a revised Draft Governance Standard for the private health insurance industry and a Discussion Paper which responds to issues raised in the first round of consultation that commenced in November 2008. PHIAC has also sought industry comments on this revised Draft Governance Standard, including comments on business compliance costs. For background about the Draft Governance Standard and the first round of consultation see our article from the February Insurance and Reinsurance Update:
The key elements of the Governance Standard are:
- specific requirements with respect to board composition and the independence of directors;
- the requirement for a board charter;
- documentation of key policies;
- the establishment of a policy on board renewal and procedures for assessing board performance;
- the composition and independence of the board audit committee; and
- the establishment of an independent internal audit function.
PHIAC received 23 submissions in response to the first consultation. Overall, the submissions were supportive of the proposed Governance Standard and revealed that a number of insurers’ practices already reflect the proposed Governance Standard requirements.
Some industry stakeholders requested clarity in the section on independence of directors. There were also enquiries whether a director who is also a member of an insurer that is a mutual would be considered a substantial shareholder. PHIAC has confirmed that fact alone would not make the director a substantial shareholder pointing to the relevant definition in s 9 of the Corporations Act 2001 (Cth). PHIAC has amended the Governance Standard in a number of areas to reflect some of the comments it received.
Amendments include:
- clarification of the definition of independent director;
- expansion of the section on chairpersons to include provisions for PHIAC to approve the appointment of a chairperson who does not satisfy the requirements of independence and to allow the chairperson to fill the CEO role without approval for up to 90 days (longer with approval);
- the requirement that the board audit committee meet at least annually;
- a new section enabling PHIAC decisions with respect to the independence of directors and chairpersons to be reviewed by the Administrative Appeals Tribunal;
- removal of the section on relations with PHIAC which required good communication between insurers and PHIAC;
- the inclusion of non-binding examples of board objectives to enable the board to assess its performance; and
- removal of the section on external consultants which stated that a board may engage external consultants or experts to advise it on any matter.
It is expected that the Governance Prudential Standard will be made public in September 2009, with a 4 month transition period.
Author
Julie Walsh, Solicitor
Update on New Zealand’s Insurance (Prudential Supervision) Bill
The deadline for submissions to the Reserve Bank of New Zealand on the draft Insurance (Prudential Supervision) Bill (Bill) closed on 22 June 2009. The Bill is due to be released in late 2009 and represents a significant change to New Zealand’s prudential regulatory regime applicable to all types of insurance business carried on in New Zealand. The new regime is expected to be based on the APRA regime in Australia, however, it is likely to be less rigorous than the APRA regime and is therefore being colloquially described as “APRA-lite”.
The Bill comprises three main parts:
Part 2
Provides for the licensing of every person carrying on insurance business in New Zealand and:
- requires the approval of the Reserve Bank for the transfer of the insurer’s business to, or its amalgamation, with another person;
- empowers the Reserve Bank to set solvency standards;
- requires licensed insurers to maintain a current credit rating with an approved rating agency;
- requires licensed insurers to maintain and comply with a risk management program which deals with: insurance risk, credit risk, liquidity risk, market risk, operational risk and any other prescribed type of risk which applies to the particular kind of licensed insurer;
- requires licensed insurers to have an appointed actuary who has access at all times to the accounting and other records of the insurer;
- requires life insurers to have at least one statutory fund in relation to their life insurance business.
Part 3
Deals with the prudential supervision of licensed insurers and empowers the Reserve Bank to:
- require the provision by insurers of information, data or forecasts about any matters relating to the business, operation or management of the insurer;
- direct an insurer to obtain an audit of any information, data or forecasts provided by the insurer;
- appoint an investigator in relation to the affairs of the insurer.
Part 4
Deals with distress management and includes inter alia the following provisions:
- The Reserve Bank may direct the insurer to formulate a recovery plan if an insurer fails or is likely to fail to maintain a solvency margin, the business of the insurer has not been or is not being conducted prudently or the insurer is failing or is likely to fail to comply with its statutory obligations.
- The recovery plan must provide for the actions the insurer will take to address the matters which led to the Bank giving the direction, a timetable for taking those actions and steps to be taken by the insurer to ensure the currency of the recovery plan, including procedures for regular review.
- The Reserve Bank will have scope to give directions to an insurer and its associated persons in circumstances of non-compliance. The Reserve Bank will also have the power to apply to the High Court for the appointment of a liquidator or administrator or for the reduction in value of one or more of the insurer’s contracts of insurance.
Author
Anisha Wijewardane, Solicitor
The New South Wales Court of Appeal has recently delivered two decisions dealing with claims against solicitors. The first, Dominic v Riz [2009] NSWCA 216, pleasingly confined the obligations of a solicitor advising on a lending transaction whilst the second, Williams v Pagliuca [2009] NSWCA 250, provided a reminder that in many professional negligence cases, the proper assessment of damages may be on a loss of opportunity basis.
Dominic v Riz
Riz is the latest of a number of cases against solicitors arising out of losses suffered by investors in Karl Suleman Enterprises (KSE). The solicitors (DDS) acted for Mr and Mrs Riz (Clients) on a transaction involving a loan from and mortgage to Perpetual Trustees Limited. The Clients used some of the money to discharge an existing mortgage and invested the balance with KSE in the expectation of extraordinarily high returns ($260K pa on an investment of $275K).
The Clients lost most of their investment and commenced proceedings against DDS. At first instance, DDS was found to be negligent. DDS appealed and the court, in upholding the appeal, made the following relevant findings:-
- In cases where the retainer was to advise on a loan and mortgage transaction, the Court confirmed that it would be going too far to require the solicitor to also address the fairness or reasonableness of the underlying investment transaction. The solicitor was not retained to advise on the investment - only to act in respect of the loan and mortgage.
- The Court affirmed the proposition that where a solicitor learns of the possibility that the client’s interests might be endangered in a way that falls outside the retainer, then the solicitor might be obliged to raise these concerns and recommend that the client seek independent advice.
- Having recommended that independent advice be obtained, it would seem that no obligation arose to ensure that such advice was in fact obtained. It was sufficient to ensure that the client understood the recommendation to seek such independent advice and the reason it was made.
- There was no breach of fiduciary duty even though DDS had previously advised KSE as DDS’s retainer did not extend to advising on the underlying investment.
The Court also held that even if DDS was negligent causation had not been established as there was no evidence the Clients would have changed their minds about the investment as a result.
Riz provides added comfort to solicitors advising on investment related transactions and to their insurers. It confirms that solicitors are not caught in a “Catch-22” situation, in that they need not open themselves up to liability for giving negligent advice on the prudence of investments which they are unqualified to give, merely to avoid the risk of liability for failing to proffer that advice. Put another way, if a transaction appears imprudent to a solicitor in a way that falls outside the retainer, then the solicitor is only required to identify the nature of the imprudence and recommend that the client obtain independent advice.
Williams v Pagliuca
Pagliuca involved a solicitor seeking to walk the tightrope of acting for both vendor and purchaser on a residential conveyancing transaction. Ms Parkin had agreed to purchase a unit from Mr and Mrs Pagliuca essentially “off the plan”. Difficulties subsequently arose over the size of one of the bedrooms and Pagliuca agreed to allow Parkin to purchase another unit in the development. Difficulties arose over the terms of the new purchase contract and the recision of the old contract.
Parkin then instructed a new solicitor who identified that the contracts exchanged for the original purchase were not identical such that there was no binding agreement. Parkin then sought a declaration that the contract was not valid and an order returning the deposit monies. Pagliuca cross-claimed for specific performance and both parties cross-claimed against the solicitor (Williams).
Parkin was successful in recovering her deposit and in her claim against the solicitor. Pagliuca succeeded in the claim against the solicitor and was awarded damages calculated as the difference ($185K) between the sale price to Parkin ($585K) and the subsequent sale price ($400K) plus interest. The solicitor appealed.
In dealing with the appeal, the Court highlighted why acting for both vendor and purchaser can be problematic for a solicitor:-
“…the Solicitor, acting for both parties, would have had to act even-handedly. Certainly, he could not have advised the Vendors that there was no contract … without also advising the Purchaser of this.”
However, of more importance was the Court’s decision on the damages flowing from the solicitors breach. In some respects it is understandable that at first instance the loss was found to be $185K as but for the solicitor’s negligence, Pagliuca would have had an enforceable binding contract. The Court did not agree on appeal and noted various factors, such as representations made by the Pagliuca’s agents, suggesting that Parkin would have sought to avoid the contract irrespective of the solicitor’s negligence. The question of damage was therefore to be properly assessed on a loss of a chance basis and the Court assessed Pagliuca’s lost chance at 30%.
This case provides some assistance to both solicitors and their insurers in reducing the value of claims brought by wronged clients. Such claims not only regularly over-state the damage suffered, the wronged client also invariably assume that they are entitled to recover 100% of all losses flowing from the solicitor’s negligence. This case reinforces that even in cases where the solicitor has been blatantly negligent, a loss of a chance approach remains relevant and, depending on the factual matrix, may result in a significant reduction in the damages payable.
Authors
Travis Toemoe, Senior Associate
Duncan Campbell, Solicitor