Asia Pacific - focus on insurance
June 2012

Australia

Phoenixing Reforms

At the end of 2011, the Federal Government introduced two draft Bills directed at clamping down on companies that engage in "phoenix" activity.  

A phoenix company is a vehicle used by directors of a failing company. Like the bird in Greek mythology, the failing "phoenix" company rises from the ashes of a former version of itself and trades with the assets and customers of the old failing company whilst leaving the debts and other liabilities in its shell.  In this way, the directors are able to block unsecured creditors of the failed company from accessing the phoenix company’s assets. Often the phoenix company bears a name very similar to the failed company, making it easy to take advantage of the failed company’s goodwill. Where the failed company has a poor reputation however, the phoenix company will often trade under an entirely different name.  

The draft legislation proposes to introduce a range of measures to make phoenix activity less attractive, whilst granting the Australian Securities and Investments Commission (ASIC) additional administrative powers.

Phoenixing Bill

The draft Corporations Amendment (Phoenixing and Other Measures) Bill 2012 focuses on amendments to the Corporations Act 2001 (Cth) (the Act) that provide ASIC with power to address phoenixing activity. The key provision gives ASIC administrative power to order the winding up of a company when, amongst other grounds, it appears to ASIC that the company is no longer carrying on business.

Currently, the Government’s General Employee Entitlements and Redundancy Scheme (GEERS) provides employees of a failed company with an opportunity to seek to recover certain unpaid entitlements. However, employees can only do so if the company is placed into liquidation, which is of no assistance to employees of a company whose directors have simply walked away from the company but not wound it up, as is the case with a phoenix company. The Bill seeks to overcome this by allowing employees access to GEERS once ASIC takes steps to wind up a company. It would also enable a liquidator to investigate the affairs of an abandoned company, including where there is suspected phoenix activity or misconduct.  

Similar Names Bill

The Corporations Amendment (Similar Names) Bill 2012 proposes amendments to the Act which would impose personal joint and individual liability on a director of a new phoenix company for debts incurred by the phoenix company where:

1. that company has the same or a similar name to the name of the failed company; and
2. the director of the phoenix company was also a director of the failed company for at least 12 months prior to its winding up.  

As such, the debts for which a director could be liable are the debts incurred by the phoenix company, not the failed company. Further, the Bill prescribes that a director could be personally liable for debts incurred by the phoenix company within 5 years of the commencement of the winding up of the failed company.  

The Bill does provide for some exemptions.  A director is not liable where:

• the failed company has paid its debts in full; and/or
• the director can establish that he/she acted honestly.

In deciding whether a director acted honestly, the court will consider:

• whether, at the time the failed company incurred the debt, there were reasonable grounds to suspect it was insolvent;
• the extent to which assets, employees, premises and contact details of the failed company have been transferred to the phoenix company; and
• whether anything done or omitted to be done by the failed company is likely to have created the misleading impression that the failed company and phoenix company are the same entity.

If a phoenix company is formed, its directors will want to be confident of the trading health and working capital of the new company as they may be personally liable for the debts of the new company for 5 years. Whilst an exemption may protect them, obtaining one could be an expensive and time consuming process.

Reaction to the Bills

The Similar Names Bill has been subject to particular criticism. One issue raised is that not all phoenix companies are created with the same or similar name to the failed company, particularly if the failed company had no goodwill with its customers. The Bill does not address this and as currently drafted, would not impose any liability on those directors who engage in phoenixing activity by using a business name which is not the same or similar to the failed company. Further, the Bill does not draw a clear line in terms of determining how similar the names of the failed and phoenix companies need to be to link the phoenix company with the failed company.

Although the Bill provides creditors of the phoenix company with access to the directors’ personal assets, it provides no recourse to the creditors and employees of the failed company, who are likely to be the hardest hit.

The proposals also appear to create the potential for the directors of multiple companies with related names in the same corporate group to get caught by the new laws, even where they have been trading honestly. Consequently, the Australian Institute of Company Directors has expressed the view that it should be made clear in the Bill that imposition of personal liability on directors should only apply when fraudulent phoenix activity has occurred, not when a business has failed.

The time period in which interested parties can comment on the Bills has now passed and the final versions of the Bills are awaited.  

For further information please contact Marnie McConnell or Jodie Odell in Sydney.

Case notes

The James Hardie Decisions: Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17; Shafron v Australian Securities & Investments Commission [2012] HCA 18

Summary

On 3 May 2012, the full bench of the High Court of Australia overturned the NSW Court of Appeal Decisions in Morley v Australian Securities and Investments Commission (No 2) and Shafron v Australian Securities and Investments Commission (No2) holding that seven non-executive directors and the company secretary/general counsel of James Hardie Industries Ltd (JHIL) breached their duties as directors or officers of the company in relation to the release of a misleading announcement to the Australian Stock Exchange (ASX).

The two decisions provide a better understanding of ASIC’s duties in bringing proceedings pursuant to the Corporations Act 2001 (Cth) (the Act). They are also, importantly, relevant to defining the duties held by non-executive directors, executive directors and management below board level, as well as clarifying the definition of "officer" under the Act.

For the full briefing: The James Hardie Decisions

Shareholder needs to show reliance on misleading and deceptive conduct - De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liquidation) & Others [2012] FCAFC 28

On 15 March 2012, the Full Federal Court in De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liquidation) handed down its decision holding that actual reliance had to be shown by a shareholder in actions brought for misleading and deceptive conduct in contravention of section 52 of the Trade Practices Act 1974 (Cth) (TPA) (which is now section 18 of the Australian Consumer Law).

Background

Between August and December 2000, De Bortoli Wines Pty Ltd (DBW) made a series of over 60 acquisitions on the Australian Securities Exchange (ASX) of shares in HIH Insurance Limited (HIH), bringing its shareholding up to approximately 20 million shares at a total cost of $7.1m.  HIH was placed into provisional liquidation in March 2001, rendering the shares effectively worthless.

On 9 February 2009, DBW submitted a proof of debt to HIH’s liquidators (the Liquidators) in the amount of $9,213,510.19. DBW alleged that the shares were acquired in reliance on misleading and deceptive information provided by HIH in breach of section 52 of the TPA, whether directly or indirectly.  The misrepresentations were said to be contained in:

• HIH financial statements and reports;
• HIH media releases published by ASIC and the ASX;
• advice given by third-parties such as stockbrokers which had in itself been based on information provided by HIH to the public; and
• representations made by former officers of HIH as to the financial health of the company.
  

The Liquidators rejected DBW’s claims on the basis that:

• the $2,073,331 claimed for loss of shares purchased by related parties was not a loss to DBW; and
• in any event it had not been established that the shares purchased by DBW were purchased in reliance on the alleged misrepresentations.

DBW brought an action in the Federal Court, seeking to overturn the Liquidators’ decision.

Federal Court Decision

HIH admitted that certain of the documents referred to contained statements which were misleading, or likely to be. However, after consideration of the relevant case law Stone J held that, in order for DBW to succeed in its claim it was necessary for it to show that it was induced into each transaction in reliance upon the misrepresentations made or alleged to have been made by HIH.

DBW relied on the fact that the representations had been made, and the fact that it had purchased the shares, allowing (it claimed) an inference that the transactions were made in reliance upon the representations. Stone J accepted that this was possible in principle following the very old case of Smith v Chadwick in which Lord Blackburn stated that:

“if it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such nature as would be likely to induce a person to enter into a contract, and it is proven that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement.”

This inference is, however, rebuttable by other evidence. Stone J held that, as reliance was a question of fact, it must be weighed in the context of all of the evidence. Should there be evidence to show otherwise, the inference will be rejected.

It was held that there was sufficient evidence to show that DBW had not relied upon the alleged misrepresentations for the following reasons:

• Mr De Bortoli,  the managing director of DBW, was unable to recall when he had reviewed the documents in which misleading statements had been made or point to any contemporaneous markings by him on those documents;
• Mr De Bortoli had been informed that a director of HIH was purchasing shares in the company and this was more likely to have prompted his acquisitions; and
• Mr De Bortoli was an experienced investor, and repeatedly asserted that he knew better than the market and relied on his own assessment, ignoring the negative market trend with respect to HIH.

Stone J also rejected a "fraud on the market" argument - that had HIH not engaged in misleading and deceptive conduct, its shares would have ceased to trade and therefore could not have been purchased by DBW.  This causation argument has not been accepted in Australia.

Appeal to the Full Federal Court

DBW appealed to the Full Federal Court on the basis that the primary judge had erred in her application of the relevant legal principles in:

1. failing to give proper weight to the “fair inference of fact” recognised in Smith v Chadwick; and  
2. applying an artificial or unrealistic test in determining whether to accept Mr De Bortoli’s evidence.

Neither party contended that the inference of reliance did not arise. Counsel for HIH merely pointed to the weakness of Mr De Bortoli’s evidence and the material which supported the primary judge’s findings. The heart of the matter was therefore whether the primary judge had erred in finding that Mr De Bortoli did not rely on the misleading and deceptive information.

The Full Federal Court held that there were five reasons why this finding was open to the primary judge and supported by evidence:

1. Mr De Bortoli conceded that his initial purchase of shares in HIH (prior to any purchases by DBW) was prompted by the information received that Mr Adler was buying shares in HIH, not the documentation which contained the misleading statements;
2. the purchases made from September 2010 onward were made in a falling market.  Mr De Bortoli insisted that he knew better than the market, which was inconsistent with his claim to have relied upon the misleading statements;
3. Mr De Bortoli maintained that he was unaware of the “considerable negative media coverage about HIH from mid September onward” despite stating that he looked at the Australian Financial Review “specifically” which had contained a highly pertinent article. This called into question the credibility of Mr De Bortoli’s evidence;
4. Mr De Bortoli was unable to provide any specifics of the alleged misleading representations made by HIH, his evidence of reliance was at a very high level, and the “thrust” of his evidence was that his decisions were made on the basis of his own strategy as opposed to any reliance on the misleading statements; and
5. although Mr De Bortoli asserted that he relied on statements made by Mr Clarke (General Manager, Public Affairs of HIH), these statements were bland and general in nature, a fact which Mr De Bortoli effectively conceded.

Conclusion

The Full Federal Court held that it was necessary for the shareholder to establish reliance on the misleading and/or deceptive conduct in order to establish that its loss was caused by such conduct.  Although the Full Federal Court did not feel it necessary to consider whether the “fair inference” of reliance arose, it notably did not reject it, but rather held that, on the facts, it was rebutted by the evidence presented.

In any case, it is clear that each shareholder must prove their reliance on misleading and deceptive conduct, and indirect causation by a class will not be sufficient to discharge that burden. This “fraud on the market” theory raised at first instance is commonly found in shareholder class actions in the USA, and is increasingly prevalent in shareholder class actions being brought in Australia. Whilst the Full Federal Court did not address the theory, it has been discussed in previous decisions and the case law to date suggests it is not available in Australia.

For further information please contact Katherine Czoch or Ross Whalebelly in Sydney.

Order of reinsurance proceeds varied

On 5 March 2012, the NSW Supreme Court held in Amaca Pty Ltd (under NSW administered winding up) & Ors v Messrs A G McGrath & C J Honey (as liquidators of the HIH Group of Companies) & Anor [2012] NSWSC 176 that reinsurance proceeds be paid contrary to general principles on the basis that it is just and equitable.

Facts

Amaca held an insurance policy with HIH which was covered by contracts of reinsurance.

The general rules for the distribution of the assets of a company in liquidation including its reinsurance assets are governed by section 562A(1)-(3) of the Corporations Act (the Act) and essentially provides that a liquidator of an Australian insurer is required to pay the proceeds of reinsurance received by them (net of expenses of or incidental to collecting the proceeds) to certain insureds in priority to other creditors, for example, unsecured creditors.

Amaca brought proceedings against the HIH liquidators seeking an order under section 562A(4) of the Act that the general rules do not apply to the receipt of specified reinsurance monies and that those monies should be paid by the Liquidators to them as priority.

Section 562A(4) states:

“the Court may, on application by a person to whom an amount is payable under a relevant contract of insurance, make an order to the effect that subsections (2) and (3) do not apply to the amount received under the contract of reinsurance and that that amount must, instead, be applied by the liquidator in the manner specified in the order, being the manner that the Court considers just and equitable in the circumstances”.

The “just and equitable” criteria contained in section 562A(4) provide the Court with wide discretion. Further, section 562A(5) of the Act lists certain matters that the Court may take into account in considering whether to make the orders sought by Amaca, including:

1. Whether it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into; and
   
2. Whether it is possible to identify persons who can be said to have paid extra in order to have particular relevant contracts of insurance protected by reinsurance; and
3. Whether particular relevant contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance; and
4. Whether a person to whom an amount is payable under the relevant contract of insurance would be severely prejudiced if subsections (2) & (3) applied to the amount received under the contract of reinsurance.

Decision

Justice Black held that it was just and equitable to make the orders sought by Amaca on the following basis:

• The limited role played by HIH in insuring the risk;
• The unusually direct relationship between the plaintiffs and the reinsurers and the fact that Amaca paid their premiums to HIH for cover to be afforded by the reinsurers rather than HIH;
• Payments which were received by HIH were directly linked to the reinsurance arrangements referrable to the James Hardie Group; and
• The prejudice to Amaca of being deprived of the proceeds of the reinsurance for which they bargained for would be significant and the adverse impact of the orders sought on the other insurance creditors of HIH would be widely diversified and therefore, the detriment suffered to any individual creditor limited.

For further information please contact Tricia Hobson or Susannah Mitton in Sydney.

First Bridgecorp, now a charge on “reinsurance” proceeds

On 9 December 2011, the New Zealand High Court held in Ruscoe v Canterbury Policy Holders HC WN CIV 2011-485-1535 that a charge under section 9(1) of the Law Reform Act 1936 (the LRA) applied so as to give Canterbury first charge over the proceeds of reinsurance. This follows the earlier New Zealand High Court decision in Bridgecorp, where it was held that section 9 of the LRA prevented directors who were insured under a Directors and Officers (D&O) policy from accessing defence costs because a charge had been placed over those proceeds.

Facts

The applicants, the liquidators of Western Pacific Insurance Limited (Western Pacific), applied to the Court for orders regarding the distribution of proceeds of reinsurance. The liquidators submitted that the proceeds were available to all claimants and unsecured creditors. The respondent, Canterbury Policy Holders (Canterbury) contended that section 9(1) of the LRA applied so as to give them first charge over the proceeds of reinsurance.

Western Pacific went into liquidation on 1 April 2011. Unsettled claims totalled approximately $60 million. An estimated two thirds of the value of those claims were said to relate to claims arising from the Christchurch earthquakes.

The earthquake claims triggered Western Pacific’s catastrophe reinsurance treaty for both 2010 and 2011. The maximum cover available for both years was $33 million. The treaties provided that the money was payable even if Western Pacific (the reinsured) became insolvent. Canterbury contended that the proceeds of reinsurance were available just to those whose claims triggered the reinsurance.

For section 9(1) of the LRA to apply, Western Pacific must have entered into a "contract of insurance", by which it was “indemnified against liability to pay any damages or compensation”.

The liquidators submitted that the requirements of section 9(1) were not met because:

1. The reinsurance was of the original subject matter and not an insurance of Western Pacific’s liability in relation to the policy; and
2. The liability of Western Pacific to the original insured was not a liability to pay damages or compensation.

Decision

The New Zealand High Court held that reinsurance contracts were included within the meaning of "contract of insurance" on the basis that they had not been expressly excluded from the ambit of the LRA. His Honour noted a tendency for legislation to expressly exclude reinsurance if there was to be “a special rule”. Further, there was nothing in legislative history that would support the interpretation that section 9(1) of the LRA did not apply to reinsurance.

France J determined that liability to pay compensation was broad enough to apply to this reinsurance situation on the basis that Western Pacific agreed to indemnify its policyholders for loss they suffered within the terms of the original policy, which was considered to be an obligation to compensate them.

His Honour held that the reinsurance treaties were triggered by Western Pacific’s liability to pay compensation to Canterbury and section 9(1) of the Act says that those policyholders have a charge on the reinsurance money that had become payable in respect of that liability.

Application to Australia

There is no authority in Australia on the NSW equivalent legislation (section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW)) applying to contracts of reinsurance.

However, in Ruscoe v Canterbury, France J referred to a number of Australian decisions that support the position that, in the absence of any express exclusions, legislation referring to insurance contracts applies also to reinsurance contracts, as in Re Dominion Insurance Co of Australia Limited [1980] 1 NSWLR 271.

Further, in HIH Casualty & General Insurance Ltd (in liq) v Wallace (2006) 68 NSWLR 603, Justice Einstein held the term “contract of insurance” in section 19 of the Insurance Act 1902 (NSW) included contracts of reinsurance. Therefore, although it is untested, it appears that section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) may apply to reinsurance contacts as well as to insurance contracts.

For further information please contact Tricia Hobson or Susannah Mitton in Sydney.

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China

China finally opens motor third party liability market to foreign invested insurers

On 30 March 2012, the State Council passed amendments to the Measures on the Compulsory Traffic Accident Liability Insurance for Motor Vehicles. These amendments, which took effect on 1 May 2012, allow China-based foreign invested property & casualty insurance companies to provide compulsory motor vehicle third party liability (MTPL) insurance.

The new legislation is the result of many years of lobbying by China-based foreign insurers for the authorities to open up the MTPL market. Prior to this, foreign insurers were only allowed to underwrite commercial auto insurance. Consequently, these insurers began exploring ways of indirectly providing MTPL insurance, for example, through strategic cooperation with qualified Chinese insurers.

We previously reported on the compulsory auto insurance market in China (for further information, please refer to Asia Pacific - focus on insurance, December 2011), when the China Insurance Regulatory Commission (CIRC) submitted a proposal to the State Council requesting that the latter open up the MTPL insurance market. We published an update on this in March 2012 (for further information, please refer to Asia Pacific - focus on insurance, March 2012) when, in a joint statement issued by the governments of China and the US on strengthening the economic relationship between the two countries, China agreed, in principle, to open its auto insurance market to foreign invested insurance companies.

It is anticipated that China’s decision to open up the MTPL insurance market to foreign insurers may, in time, help to reverse chronic economic losses in the auto insurance industry and improve service to better assist the victims of traffic accidents.

CIRC suspends granting new licences to regional insurance agencies

On 26 March 2012, CIRC issued a notice on its website stating that it has suspended granting new licences for regional (as opposed to national) professional insurance agencies, and licenses for branch offices of existing regional agencies. In addition, CIRC confirmed that it will not be issuing licences for sideline insurance agencies (agencies that engage in insurance business on a part-time basis), unless the applicant is a financial institution or an entity operating in the postal industry.

The aim of the suspension is to prohibit smaller, less-experienced agents from entering the market. CIRC has also indicated that it is in the process of amending insurance agency regulations to raise the entry thresholds to further prevent entry to the market for these smaller agencies. It remains unclear how long the suspension will last.

On 27 March 2012, CIRC published responses to questions raised in correspondence in relation to the publication and implementation of the notice. According to the responses, over 190,000 sideline insurance agencies already exist in the market. Apart from the 130,000 sideline insurance agencies classified as financial institutions or postal industry entities (who are not affected by the suspension), the majority are small scale agencies who have significantly less experience. CIRC has attempted to encourage the establishment of professional insurance agencies by approving national licenses, however, regional professional agencies with registered capital of less than RMB2 million remain dominant in the market.

CIRC issues plan for establishing a Solvency II Regime

On 29 March 2012, CIRC issued the Plan for the Establishment of China’s Solvency II Supervision Regime (the Plan). China’s Solvency I regime, established between 2003 and 2007, introduced the concept of capital management to the Chinese insurance industry and aimed to improve the management of insurers. Under the Solvency I regime, an insurance company is required to maintain an adequate solvency level with a solvency ratio of not less than 100%.

Since 2008 and the financial crisis, major insurance economies and international organisations have begun to promote improved solvency regimes. The International Association of Insurance Supervision issued 26 new and core supervision principles (including the solvency principle) in October 2011. Meanwhile, the European Union is actively promoting Solvency II which is expected to be implemented in its Member States by 1 January 2014. In the United States, the National Association of Insurance Commissioners has proposed amendments to its solvency regime and expects to complete the relevant reforms by the end of 2012.

In light of these reforms, the State Council requested that the financial regulators (including CIRC) adapt the solvency regime as far as possible to meet these new international standards. In general terms, the Plan put forward the following key proposals:

• Establishment of a "three-pillar" structure. This would ensure the implementation of adequate capital, risk management and disclosure requirements. Insurers would also be subject to stronger regulatory supervision on capital calculation and risk management with an obligation of public disclosure in addition to regular reporting required by CIRC.
• Refine the classification of risks. This includes the accurate quantification of different types of risks so as to improve the risk-sensitivity of the solvency rate. The lack of experienced risk management professionals is acknowledged as a potential obstacle to this proposal.
• Strengthening supervision of insurance groups. This proposal is designed to ensure that within each insurance group there is a unified top-down system to regulate the members of that group.

Potential liberalisation on investment by insurance funds

CIRC recently announced that it has drafted the Administrative Measures on Overseas Investment by Insurance Funds (the Measures), and is in the process of consulting on the Measures with several insurance asset management companies. It is understood that CIRC intends to further remove restrictions on overseas investment by insurance funds, meaning more categories of investment products and multiple jurisdictions will be available for investment. CIRC has not yet provided a timeline for the implementation of the Measures.

The existing regime allows insurance funds to invest in several categories of investment products, as long as total investment does not exceed 15% of the principal’s total assets at the end of the previous year. Currently there are no implementation rules setting out requirements for investment channels and specific investment products, however, it is anticipated that formal publication of the Measures may encourage insurance funds to invest in products and jurisdictions which have not historically been popular with Chinese investors (i.e., markets outside Hong Kong and the US). This may help to mitigate the potential adverse impact of financial turmoil, or an adverse change in the currency rate of a single market.

In addition to the Measures liberalising the overseas markets, Mr Xiang Junbo, CIRC Chairman, announced during his trip to Wenzhou City, Zhejiang province, in April 2012 that new rules will be issued to deregulate domestic investment by insurance funds. Similarly to the Measures, these new domestic rules aim to increase and diversify the types of products invested in (e.g. unsecured corporate bonds) and simplify the regulatory regime of investment.

On 7 May 2012, CIRC issued its Notice on the Supervision of use of Insurance Funds (the Notice). According to the Notice, insurers are allowed to purchase certain types of publicly offered bonds such as unsecured corporate bonds, non-financial institution debt financing products, and convertible unsecured corporate bonds. In addition, the Notice provides a definition of “material equity investment”, which will require pre-approval by CIRC. For those investments outside the scope of the definition, or certain types of investment products such as infrastructure debt investment plans and real estate investments, subsequent filing will still be sufficient. The Notice also confirms that CIRC will issue implementation rules on the use of insurance funds, in particular the rules on proper adjustments over the investment ratio by insurance funds.  

CIRC’s new tax-deferred pension plans likely to be implemented in Shanghai soon

CIRC is currently in the process of drafting a pilot scheme, expected to be launched in 2012, for new tax-deferred pension plans (the Pilot Scheme). According to a recent publication on the Shanghai Finance website, approval of the Pilot Scheme will provide tax breaks for holders of both annuity pensions and commercial pension insurance. The aim of these tax breaks is to encourage local residents to spend more money on commercial pension products, while also helping insurers to achieve a substantial increase in premiums.

Several major organisations in the market have indicated that they have already started preparing for the changes in order to benefit from new opportunities once the Pilot Scheme is launched. Such preparations include, among other things: product development; client source gathering; and the completion of business operation formalities.

For further information please contact Ai Tong in Shanghai.

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Hong Kong

Hong Kong insurers beware: new EU sanctions on transport of Iranian oil around the corner

In recent months, Hong Kong insurers covering tankers carrying Iranian oil have come under increasing pressure due to the impact of international sanctions. On 23 January 2012, the European Council’s Decision 2012/35 imposed stricter sanctions on Iran. These sanctions were incorporated into Regulation No. 267/2012 (the Regulations) on 23 March 2012, replacing Regulation 961/2010 with immediate effect.

The Regulations

1. Who is governed by the Regulations? The Regulations are binding on: individuals and companies located within the EU; individuals of EU nationality; and companies incorporated or registered in the EU but located outside the EU.
2. Impact on crude oil, petroleum products and petroleum products. Under Article 11 and 13 of the Regulations, the import, purchase, transport and financing (including insurance and re-insurance) of crude oil, petroleum products and petrochemical products from Iran is prohibited (the Prohibitions).
3. Exclusions. Trade contracts and ancillary contracts concluded before 23 January 2012 are excluded from the Prohibitions under Articles 12(1) and 14(1) of the Regulations. In addition, third party liability insurance and environmental liability insurance and reinsurance are excluded from the Prohibitions until 1 July 2012 for crude oil and petroleum products. Under Articles 12(2) and 14(2), the Prohibitions for petrochemical products were also excluded, however, this exclusion expired on 1 May 2012.

Impact on Hong Kong insurers

The Regulations do not directly affect Iran’s major crude oil importers, namely the People’s Republic of China (PRC), India, South Korea and Japan, however, it is European insurers that cover the majority of the world’s oil tanker fleet. When the remaining exclusion expires on 1 July 2012, European insurers will be unable to continue to provide cover and, therefore, it would appear that no single insurance company could take on the potential risks of transport of Iranian oil.  It would be prudent for Hong Kong insurers to assess how this loss of reinsurance coverage will affect current policies, especially those effective beyond July 2012.

Whilst Asian ship owners are searching for alternatives to European cover, insurers elsewhere are already taking a more precautious approach as a result of the Regulations. Maritime insurers based in Hong Kong have indicated that they will not provide full cover for tankers carrying Iranian oil from July 2012 and similarly, China's P&I club will cease to provide indemnity cover from the same date.

There has been speculation that the PRC government will assist with insuring the risk of transporting Iranian oil, however, this has been overshadowed by the National Defense Authorisation Act for Fiscal Year 2012 (NDAA). The US President, under the NDAA, has discretionary powers to impose financial sanctions on foreign banks that carry out financial transactions related to the purchase of Iranian oil. The sanctions could apply, at the earliest, by 28 June 2012 and any penalties imposed will effectively cut off a foreign bank from the US financial system. The US President has the discretion to exempt the country with primary jurisdiction over the banks on the condition that the volume of Iranian oil purchased is significantly reduced.

Conclusion

The Regulations have significantly reduced the reinsurance market available to Hong Kong firms insuring the transport of Iranian oil. As a result, it is likely that adequate insurance cover will be hard to find after 1 July 2012, and ship owners will expect to bear the risk and liabilities in full or in part. As the pressure on Iran continues to build, Hong Kong insurers will inevitably suffer the consequences.

For further information please contact Marie Kwok or Timothy Lam in Hong Kong.

Insurance Law in Hong Kong: Challenges and Prospects

Norton Rose Hong Kong will be holding a joint event with Thomson Reuters which includes a book launch and panel discussion on 12 June 2012 from 5.30 - 8.00pm. An expert panel will address recent legal developments in the insurance sector. Guests will have the opportunity to exchange views with the panel and discuss/debate matters of topical interest. The panel will consist of experts in the field of insurance law including the author Professor Robert Merkin.

For further information: Insurance Law in Hong Kong: Challenges and Prospects

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