The importance of seamless cover
/Trustees Executors Ltd v Fund Managers Canterbury Ltd [2016] NZHC 2194
Fund Managers Canterbury Limited (FMC) was tasked with managing the Canterbury Mortgage Trust Group Investment Fund (the Fund), which had invested primarily in mortgage securities since 1999. FMC’s obligations as the manager of the Fund were set out in a Trust Deed between FMC and the Trustee of the Fund, Trustees Executors Limited (TEL).
Clause 214 of the Trust Deed required FMC to certify to TEL, among other things, that FMC had used its best endeavours to manage the fund, that each mortgage met TEL’s lending criteria, and that no matters had arisen that could adversely affect investors’ interests. These certificates were provided quarterly, and signed by two directors of FMC.
Following the suspension of the Fund in 2008, TEL brought proceedings against FMC and its directors, alleging that they had failed to comply with the Trust Deed. In particular, they said that clause 214 had been breached and the directors were personally liable in damages to TEL on the basis of the certificates, as they had assumed responsibility for their content (by signing them), and knew that TEL would be relying on them.
D&O Policy
FMC’s directors were insured under a Directors and Officers Liability Insurance policy (the D&O policy), with a sum insured of $2m and no retroactive date. The directors also had a Professional Indemnity policy (PI policy) which, on the other hand, had a sum insured of only $1m and a retroactive date of December 2006. While the underwriter accepted that the PI policy responded, it flagged the limited sum insured and the possibility that the retroactive date may apply to limit cover.
The directors sought cover under the D&O policy. This was subject to an endorsement, however, which excluded cover for loss in connection with any claim:
“Alleging, arising out of, or based upon or attributable to the Company’s, or an Insured’s performance of professional services for others for a fee…”
The insurer advised the directors that it considered cover to be excluded by the endorsement. Consequently, the directors joined the insurer as a third party to the proceedings and the question of whether cover was available was heard as a preliminary question.
Whether cover was excluded hinged on whether the directors’ role of providing certificates and confirmation constituted “the performance of professional services for others for a fee.” The court interpreted the endorsement as applying where the claim arises either out of:
The directors’ own performance of professional services for others for a fee; or
FMC's performance of professional services for others for a fee.
So while the excluded services could be performed by either FMC itself or by the individual directors, the services had to be provided to “others” and “for a fee.” Under the trust deed it was FMC who was providing the certificates to TEL. The directors’ role was to prepare these for FMC, but the judge held that this could not properly be considered a service by the directors for “others for a fee,” as it was within the scope of their employment with FMC.
But the judge took a somewhat expansive view of what constituted “professional services” and held that the endorsement applied to the provision of certificates not because they were discreet “professional services” for which a fee was charged, but because it was an “adjunct” to the broader professional services for which FMC was being paid. The judge considered that “the provision of assurances as to the quality of service being provided…[is] part and parcel of the service itself.”
It was argued by the directors that this interpretation would “swallow” the whole policy. It would exclude cover, they said, for everything they did in pursuit of the company’s business, as FMC’s sole function (i.e. its professional service) was to manage the Fund, and everything they did for the company “arose out of” that service.
While this argument did give Ellis J pause, she ultimately concluded that the directors were still left with “meaningful cover” under this interpretation, as regulatory claims (like a breach of the Companies Act or the Securities Act) and claims by potential investors who paid FMC a discrete fee for its services, would not be excluded.
PI Policy
Having found that the D&O policy did not apply, the judge then turned to whether the PI policy provided cover.
The PI policy expressly excluded cover for any claim “brought against an Insured as a director, officer or equivalent executive.” At first blush this exclusion would apply, since the directors of FMC were sued as directors. However, having found in the context of the D&O policy that the directors’ certification role was a professional service, the judge construed the D&O and the PI policies in a way which presumed no gap in cover was intended. She said “[i]t may be legitimate,” therefore, “to refer to one [policy] when interpreting the other.” Thus, the judge held, “the general exclusion in the PI policy can and must be interpreted in light of the more specific exclusion in the D&O policy,” and consequently the judge held that there was cover under the PI policy.
Comment
The decision reinforces that, when considering the interpretation of a number of policies, a court will consider the commercial intent of the policies as a whole; it will presume that the parties intended to provide comprehensive cover, rather than create a ‘gap’ in cover which will leave an insured without cover.
At a practical level this decision reinforces the importance of looking carefully at the terms of all policies, including the sum insured and retroactive date. If the sum insured for the PI policy been more favourable and had there been an unlimited retroactive date, maybe this dispute would not have been before the courts at all.
If you have any questions or comments about this article, you can contact Philippa Fee via philippa.fee@feelangstone.co.nz, or Elliot Macdonald via elliot.macdonald@feelangstone.co.nz
