High Court to decide on New Cap Re asset distribution.

Overseas insurers and reinsurers could end up taking a back seat when it comes to recouping losses as the High Court of Australia prepares to test the way assets of insolvent re/insurers are distributed. The High Court will decide whether failed reinsurer New Cap Re's assets must be distributed to Australian creditors first, before overseas insurers and reinsurers are paid.

The High Court has granted insurer Assetinsure Holdings Pty Ltd leave to appeal against a 2004 New South Wales Court of Appeal decision that found liabilities in Australia included liabilities to indemnify domestic and overseas insureds.

New Cap Re went into liquidation in 1999 owing money to Australian and foreign creditors. The liquidator initially applied to the NSW Supreme Court to determine how recoveries should be distributed. The Supreme Court ruled all New Cap Re's liabilities were “in Australia” because the reinsurer was resident in Australia. The NSW Court of Appeal upheld that view when it dismissed Assetinsure's appeal in October 2004.

Australia's Insurance Act says an insolvent insurer's assets “shall not be applied in the discharge of its liabilities other than its liabilities in Australia, unless it has no liabilities in Australia”.

Assetinsure argues that the way the courts have interpreted the law dilutes Australian policyholder protection and is contrary to Australian Prudential Regulation Authority guidelines and the act.

Assetinsure took over Gerling Global Re, which is owed A$11.8m by New Cap Re, in September 2003. John Hewitt, Assetinsure general counsel, said offshore risks should not be included in the definition of Australian liabilities “The fundamental protection for Australian policyholders provided by the law is the requirement for insurers to have assets in Australia exceeding liabilities in Australia. This is an important test of the APRA guidelines and policyholder protection.”

Law firm Clayton Utz acts on behalf of Assetinsure. Nancy Milne, Clayton Utz insurance and risk consultant, said the NSW courts' interpretation of the law was not consistent with other aspects of Australian insurance regulation. She said the Insurance Act required insurers to hold capital in Australia to cover Australian liabilities, but, when that capital amount was calculated, insurers were not necessarily including overseas liabilities.

The Insurance Council of Australia (ICA) may seek to get involved in the case. Dallas Booth, deputy CEO, said the ICA was examining implications for the industry.