The High Court will have to decide on the payment priority of creditors in the New Cap Re case, which begins on December 7. New Cap Re went into liquidation in 1999, but questions have arisen over the payment priorities of creditors. The judges will be 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.

According to the Act, an insurance company’s assets in Australia are to be used to discharge its liabilities in Australia first. Australian-based reinsurer New Cap Re went into liquidation in 1999, and the appeal is being brought by Assetinsure, which was formed after Gerling Global Re Australia was sold.

Assetinsure General Counsel John Hewitt says the fundamental protection provided by the Insurance Act to Australian policyholders is twofold. “There must be sufficient assets in Australia to cover the insurer’s liabilities in Australia, and those assets must be used to discharge Australian liabilities first.”

An interpretation of “liabilities in Australia” proffered by London insurer Faraday Underwriting and liquidator John Gibbons of Ernst & Young would take in a large number of foreign risks, such as commercial property insurance in the US.

“If this argument were accepted it would vastly increase the number of creditors entitled to payment priority and undermine the position of Australian policyholders,” Mr Hewitt said.

“It is contrary to [Australian Prudential Regulation Authority]-approved industry practice and there is a flow-on effect. 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.

“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.