That Wasn´t Supposed To Be Covered! General Reinsurance Australia Ltd V HIH Casualty & General Insurance Limited (In Liquidation) [2009] NSWCA 22 - A Cautionary Tale For Reinsurers

Reinsurance treaties often employ general language and avoid complicated drafting, preferring to rely on the common understanding of the parties and the insurance industry in general.

A recent decision demonstrates the differences in opinion that may arise between reinsurers and cedants, and the risks faced by reinsurers in relying on vague terminology and appeals to common industry understandings. It also highlights the importance of good communication, which in this instance could possibly have avoided years of litigation.

This update contains a brief discussion of some of the issues and policy nuances dealt with in the case.

In General Reinsurance Australia Ltd v HIH Casualty & General Insurance Limited (in liquidation) [2009] NSWCA 22, the NSW Court of Appeal upheld the primary judge's finding that HIH's reinsurance claim in respect of payments to Suncorp Metway Limited fell within HIH's treaty with Gen Re. In doing so, it adopted a broad definition of a 'trade credit policy' and rejected Gen Re's assertions that industry practice supported a narrower definition.

The 'trade credit' policy and treaty

From 3 December 1997, Suncorp provided Daewoo Australia Limited (Daewoo Aust) with commercial funding under a trade finance facility. In November 1998, a transaction structure was outlined using trade credit insurance. On 29 March 1999, Suncorp and Daewoo Aust entered a written agreement styled as a trade finance agreement. At about the same time, HIH wrote a policy insuring Suncorp for the period 23 March 1999 to 31 March 2000 (Suncorp policy). HIH was aware of the underlying structure between Suncorp and Daewoo Aust but Gen Re was not.

At first instance McDougall J made orders to the effect that Gen Re, as reinsurer, was obliged to pay HIH sums under its quota share reinsurance treaty in respect of a class of insurance described as 'Trade Credit and Export Credit'. Gen Re appealed.

Was it a 'trade credit' policy and should HIH have paid?

The issues at first instance and on appeal were:

1. whether the Suncorp policy was a 'trade credit' policy; and
2. whether Suncorp's claims fell within the terms of the Suncorp policy.

The primary proposition of Gen Re on appeal was that whilst the broker's summary of the transaction contemplated sales from the supplier to Suncorp and from Suncorp to Daewoo Aust in a form of a string of contracts, this was not the case in practice. Gen Re submitted that the supplier, a Daewoo subsidiary in Hong Kong (Daewoo HK), sold the goods in question direct to Daewoo Aust and no title to them was ever obtained by Suncorp. If accepted, arguably, the Suncorp policy would not respond and, even if it did, it would be responding to a class of risk that might not be a trade credit risk. Gen Re sought to characterise the legal relationship as reflecting financial risk rather than trade credit risk.

Much attention on appeal was paid to whether Suncorp actually took title to the relevant goods from the supplier, Daewoo HK, and passed that title on to Daewoo Aust in a second sale transaction. This was essential for the application of the definition of 'Delivered' in the Suncorp policy because at no time were the goods under the physical control of Daewoo HK, Suncorp or Daewoo Aust. Therefore, for the Suncorp policy to respond, legal title to the goods in question had to pass from Suncorp to Daewoo Aust.

On the question of whether the underlying insurance was a 'trade credit' policy, the parties called competing expert evidence. Gen Re argued that the Suncorp policy did not fall within the class of insurance policies known in the Australian insurance industry as 'trade credit insurance' and the mere fact that the risk had some connection with trade was insufficient. Suncorp did not ordinarily trade in the goods acquired by Daewoo Aust or physically supply them. Gen Re's expert contended that policies insuring financial institutions would only fall constitute 'trade credit insurance' if the institution supplied, in a narrow sense, the relevant goods on credit.

In contrast, HIH's expert put forward a broader formulation including policies directly insuring banks that finance trade transactions even if the goods are only 'Delivered' in the sense contemplated in the Daewoo transaction as such policies nevertheless involve trade credit risk. Allsop P (with whom Hodgson and Macfarlan JJA agreed) confirmed the primary judge's view and accepted that the trade credit insurance included cover for non-payment of goods 'supplied', in the manner contemplated in the Daewoo transaction, by a financial institution to a buyer on credit.

In relation to whether Suncorp's claims fell within the terms of the Suncorp policy, Allsop P considered that the proper approach to be taken was to determine:

1. whether Daewoo HK sold the goods to Suncorp; and
2. if so, did Suncorp on-sell to Daewoo Aust?

His Honour noted that there was no suggestion that the arrangements were a sham, so the terms of the arrangements were taken to reflect the parties' true intentions. His Honour referred to the cases dealing with properly characterising the relationship and considered that this was not relevant in the circumstances, as the relevant question was whether Suncorp supplied the goods to Daewoo Aust in the sense of passing title to it.

His Honour was of the view that the invoice from Daewoo HK to Suncorp was a crucial document as it was directed to Suncorp as the buyer. Suncorp then paid the invoice. His Honour drew the inference that the delivery of the invoices to Suncorp by Daewoo HK and its payment amounted to a contract between two commercial parties. As such, it was a novation of any pre-existing arrangement. It created a legal relationship at the request of Daewoo Aust between what can be described in commercial terms as supplier and financier with the clear commercial intention of on-sale by the financier.

His Honour made the following comments:

Daewoo HK can be taken as offering to sell the goods to Suncorp by directly invoicing it (having been requested to do so by the letter of credit and, one would naturally infer, having been otherwise requested to do so). Daewoo HK was intending to divest itself of title by sale. Given that Daewoo Aust (to whom the bills of lading were sent) and Suncorp had a commercial relationship in which the latter provided the former with financial accommodation, the nature of any title to be held by Suncorp rested on their mutual intention. That intention was to be found in unequivocal terms in the Trade Finance Agreement....

The Court therefore held that the attacks on the primary judge's conclusions should fail and the appeal should be dismissed.

Lessons for the future

This decision provides a timely reminder of the need to carefully define the scope of reinsurance treaties. Relying upon vague language and the industry understanding of words can prove costly, particularly when terms are not defined and open to a range of interpretations.

It is a sad reality that the reinsurance field is becoming more litigious and in the new era of contract certainty, it may be time to move away from the traditional 'hand shake' approach in favour of more specific drafting.

The decision also demonstrates the importance of good comminication between reinsurers and cedants. If Gen Re had been informed of the Suncorp policy nuances and endorsed them, years of litigation may have been avoided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.