Professional services exclusion in D&O policy read down to provide cover
November 21, 2017
Fund Managers Canterbury Limited v AIG Insurance New Zealand Limited  NZCA 325 (28 July 2017)
This decision concerned an appeal from a Judge of the High Court of New Zealand (the equivalent of the Supreme Court in Australia), concerning a Directors’ and Officers’ Liability policy and a Professional Liability policy underwritten by AIG Insurance New Zealand Ltd.
Fund Managers Canterbury (FMC) entered into a Trust Deed with Trustees Executors (TE) (as trustee for unitholder investors) to manage a contributory mortgage investment fund. FMC was obliged to invest the fund in authorised investments in accordance with an investment policy and agreed guidelines.
FMC was also obliged to provide TE with quarterly certificates signed by two directors, certifying that FMC had, to the best of their knowledge or belief, complied with the terms of the Trust Deed.
The General Manager for FMC was also required to provide written confirmations to TE that each new mortgage met stipulated lending requirements.
Following substantial losses to the fund, TE issued proceedings against FMC’s directors for negligent preparation of the certificates and the confirmations, and for misleading and deceptive conduct. There were separate claims against FMC for breaches of its obligations under the Trust Deed.
The issue that arose was which policy responded to the claims made against the directors. The D&O policy had a higher limit than the PI policy. All parties involved accepted that either the D&O or the PI policy would apply.
The D&O policy
The operative insuring clause under the D&O policy provided that:
The Insurer will pay to or on behalf of any Insured Person Loss incurred by the Insured Person arising from any Claim for any Wrongful Act, unless the Insured Person has been indemnified by the Company for that Loss.
The ‘Company’ was defined as the ‘Policyholder’, which was FMC. ‘Insured Person’ included any past, present or future director of FMC. Each of the directors was therefore an ‘Insured Person’.
AIG submitted that the D&O policy did not respond, relying on an endorsement to the D&O policy which provided:
This Policy does not provide payment for Loss in connection with any Claim made against the Insured:
Alleging, arising out of, based upon or attributable to the Company’s, or an Insured’s performance of professional services for others for a fee….
The PI policy
The PI policy provided cover for ‘Claims’ against the ‘Insured’. ‘Insured Person’ was defined to include any natural person while an executive of an Insured Company. ‘Insured Company’ includes the policy holder, FMC. The directors are therefore ‘Insured Persons’ under this policy.
However, the PI policy also contained an exclusion in connection with any claim ‘brought against an Insured as a director, officer or equivalent executive’.
The decision under appeal concerned the question of whether the giving of the certificates and confirmations constituted ‘the performance of professional services for others for a fee,’ such that the D&O exclusion would operate.
The Judge found that the provision of the certificates and the confirmations were ‘adjuncts’ to the provision of professional services. This conclusion presented her with two concerns. First, given the sole function of FMC was to manage the fund, everything done by the directors could plausibly be characterised as an adjunct to the performance by FMC of its fund management role. This would effectively mean that the endorsement would exclude all cover under the policy. AIG countered that the D&O policy would still cover certain claims of a regulatory nature.
The second issue for the Judge was that in the provision of the certificates and confirmations, the directors were acting in their capacity as directors of FMC. This would mean that cover would be excluded under the PI policy as well.
Rather than countenance this position, the Judge resolved the issue by interpreting the general exclusion in the PI policy in light of the more specific exclusion in the D&O policy. In essence, the Judge found that the effect of the D&O exclusion was not only to ‘deem’ that the provision of the certificates and confirmations constituted the performance of professional services, but also to ‘deem’ that the directors were not acting in a director and officer capacity when providing them. This meant that the D&O exclusion applied, but not the PI exclusion.
The Court of Appeal in its decision first considered whether the PI policy applied. The Court considered there was an inconsistency in AIG’s position, in that if AIG accepted the claim fell within the insuring clause of the D&O policy (which it did), it would follow that the claim would be excluded under the PI policy because it is a claim against a director. The Court noted that,
It seems to us that it follows inevitably from AIG’s (correct) acceptance that the claims come within the insuring clause under the D&O policy and the proviso to the exclusion clause in that policy that the claims must also fall within the scope of the exclusion clause under the PI policy.
That is, the claims were brought against the directors as directors.
The Court of Appeal further considered that there was no justification for the High Court Judge’s position that the endorsement had a deeming effect on a separate exclusion in a separate policy. The Court noted that clear words would be required to achieve such a radical re-characterisation of the directors’ actions. The meaning and intent of the exclusion in the PI policy was clear and was not altered by the endorsement in the D&O policy. It had to be given effect according to its terms. As such, cover was not available under the PI policy.
Next, the Court turned to the D&O policy. The Court considered that a literal reading of the D&O policy would be contrary to the purpose of the policy. Starting from the (accepted) proposition that cover would be available under one of the policies, the Court confirmed that it considered there to be a clear exclusion under the PI policy. Secondly, as noted by the High Court, since the sole function of FMC was to manage the fund, everything done by the directors could plausibly be characterised as an adjunct to the performance by FMC of its fund management role. While the Judge considered this concern to have been addressed by AIG’s submission that the D&O policy would still cover claims of a regulatory nature, the Court of Appeal disagreed. In particular, another endorsement to the D&O policy specifically excluded cover or claims by any governmental, national or state regulatory agency. This along with the subject endorsement would severely limit the extent of cover available under the D&O policy. As such, the Court considered a narrow reading of the exclusion was warranted in order to provide meaningful cover under the D&O policy. Finally, the Court said that in cases of ambiguity, exclusion clauses should be read down.
The Court held that the claims did not arise out of FMC’s performance of professional service for a fee. The Court said that the provision of the certificates and confirmations were not themselves acts or performance of FMC’s professional services, but were rather statements concerning past performance. The claim was not that the certificates or confirmations were not provided in breach of FMC’s duties, but that they were negligently prepared by its directors. Consequently, cover was not excluded by the endorsement.
This decision illustrates the narrow way a professional services exclusion will be interpreted in a D&O policy. Even though the certificates and confirmations were provided in the course of professional services, this was not sufficient to attract the exclusion.
Authored by Tim Daley, Lawyer, Melbourne
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