Indemnity Insurance Liabilities Can Make Insurer Insolvent

An insurer who provides indemnities against paid losses may be legally insolvent if it is unable to pay liabilities which have been incurred but which are not yet payable.

Background

New Cap Reinsurance was a reinsurer. Its policies provided an indemnity to insurers for losses paid by the insurers once those losses had exceeded a threshold sum.

As at 31 December 1998, reinsureds had notified New Cap of the occurrence of insured events and provided estimates of their liability in relation to those events. In April 1999 New Cap went into liquidation. The liquidator filed a number of claims in the NSW Supreme Court. These claims related to alleged voidable transactions in the period leading up to the liquidation. To establish these claims, the liquidator had to prove (among other things) that New Cap was insolvent at various points in the six months before his appointment.