SYDNEY, October 27, 2005. When an insurance company is being liquidated and has $100 of assets and $150 of claims, which claims get paid first?

This is the question the High Court is being asked to decide in the New Cap Re case which has been set down for hearing on 7 December. New Cap Re was an Australian based reinsurer which went into liquidation in 1999.  In the winding up questions arose concerning the payment priority of creditors.

The Court is being asked to define the expression "liabilities in Australia" as used in the Insurance Act.  It is the first time the issue has come before the Australian courts.

In a winding up, the Act says an insurance company’s assets in Australia are to be used to discharge its liabilities in Australia first.  The appeal is being brought by Assetinsure, formerly Gerling Global Re Australia.

John Hewitt, General Counsel for Assetinsure, said:

"The fundamental protection provided by the Insurance Act to Australian policyholders is twofold.  First, there must be sufficient assets in Australia to cover the insurer’s liabilities in Australia and secondly, those assets must be used to discharge Australian liabilities first."

London insurer, Faraday Underwriting Limited, and the liquidator, John Gibbons of Ernst & Young, are understood to be arguing for a broad interpretation of what constitutes "liabilities in Australia".

Mr Hewitt said the definition of "liabilities in Australia" being put forward by the London insurer would take in a large number of foreign risks, like commercial property insurance in the USA.

"If this argument were accepted it would vastly increase the number of creditors entitled to payment priority and undermine the position of Australian policyholders.  It is contrary to APRA approved industry practice and there is a flow-on effect", he said.  "If liabilities in Australia were ‘inflated’ insurers would be required to substantially increase the level of funds held in Australia and this could make the marketplace less competitive."
 
The Government has given Australian policyholders preferred payment status in a winding up to avoid the HIH problem - having to use taxpayer funds to bail out local policyholders and pay their claims.

Mr Hewitt said: "As this is an important case for the industry, and APRA’s role is to protect Australian policyholders, we have asked APRA to join in the proceedings. They are considering our request."

He said the sample policy being used in the proceedings protected a US company against damages to its property situated in America.  The company had no presence or operations in Australia.

The liquidator and the London insurer say a claim under the policy should be treated as a "liability in Australia" based on a statutory interpretation argument.

"To suggest an insurance claim by a US company for damage to a property it owns in America should be regarded as ‘Australian’ is very hard to comprehend and seems contrary to the underlying purpose of the Act - protection of Australian policyholders" said Mr. Hewitt.

About Assetinsure

Launched in April, 2004 Assetinsure is an APRA regulated, Australian-owned company that brings additional choice to the Australian insurance market by providing specialist insurance products such as Professional Indemnity Property, Construction, General Aviation and Financial Risk. The company is owned by Assetinsure Holdings Pty Limited which has Babcock & Brown as a 50% shareholder.

For more information

Peter Wedgwood
Chief Executive Officer
Assetinsure Pty Limited
T: (02) 8274 2832
F: (02) 9251 8061
E: peter.wedgwood@assetinsure.com.au

John Hewitt
Company Secretary & General Counsel
Assetinsure Pty Limited
T: (02) 8274 2831
F: (02) 9251 8061
E: john.hewitt@assetinsure.com.au