An issue that can commonly arise under D&O policies is whether the acts of the directors or officers that are the subject of claims constitute professional services and are excluded under a professional services exclusion in the D&O policy, or are otherwise covered under a separate professional indemnity insurance policy. The issue should be determined by reference to the specific conduct of the director or officer and the specific wording in the relevant policies. However, disputes can arise when the specific policy wording is unclear, and this is what led to the recent decision of Fund Managers Canterbury Limited v AIG Insurance New Zealand Limited  NZCA 325.
In this case, the New Zealand Court of Appeal was asked to consider the proper interpretation to be given to the insuring clauses and exclusions in a Directors’ and Officers’ Liability policy (D&O policy) and a Professional Liability for Financial Institutions policy (PI policy) underwritten by AIG Insurance New Zealand Limited (AIG NZ) in respect of claims by directors for conduct purportedly carried out in that capacity. In finding in favour of the insured, the Court reaffirmed the long standing principle that policies of insurance should be interpreted in a business-like way, including, amongst other reasons, by reference to their commercial purpose and objective, and where ambiguity exists, policy exclusions should be read down in favour of cover.
Fund Managers Canterbury Ltd (FMC) was responsible for managing a contributory mortgage investment fund on behalf of Trustees Executors Ltd (TE). FMC was obliged to invest the fund in authorised investments, and as part of this process, FMC provided TE with directors’ certificates and communications, which respectively certified that they had made all due enquiries and confirmed that each new mortgage investment met stipulated lending criteria.
Following substantial losses to the fund, TE pursued claims for negligence and misleading or deceptive conduct against FMC’s directors in relation to the certificates and communications (claims were also pursued against FMC). There was no dispute that the directors had a right to indemnity from AIG NZ in respect of the directors’ claims. The proceedings arose out of AIG NZ’s decision that the claims were covered under the PI policy and not the D&O policy, which was more favourable to the directors.
Relevant policy provisions
The D&O policy included the following insuring clause and endorsement:
‘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’.
‘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, or any alleged act, error or omission relating thereto, including but not limited to, services rendered in the following areas: broker; dealer; financial advisor; investment advisor; real estate syndicator; or services rendered in the Company’s Trust Department or as a trustee or other fiduciary or agent for individuals, partnerships, corporations or governmental bodies; or any function similar to those mentioned above, or any other professional services…[endorsement exclusion]’.
The PI policy provided cover for ‘Claims’ against the ‘Insured’ reported to the ‘Insurer’ during the policy period. ‘Claim’ was defined to mean a claim for damages as a result of a ‘Wrongful Act’, and a ‘Wrongful Act’ was defined to include a ‘Breach of Duty’ (defined in the usual way). The PI policy included an exclusion in respect of any claim ‘brought against an Insured as a director, officer or equivalent executive’ (D&O exclusion).
First instance decision - Trustees Executors Ltd v Fund Managers Canterbury  NZHC 2194
At first instance, the trial judge accepted AIG NZ’s contention that despite falling within the insuring clause of the D&O policy, the directors’ claims were excluded by the endorsement exclusion. The trial judge focused on the words ‘arising out of, based upon or attributable to the Company’s, or an Insured’s performance of professional services for others for a fee’ in the endorsement exclusion. Her Honour found that whilst the insured directors had not performed professional services to TE, given they had no contractual or client relationship with TE, FMC had performed professional services for a fee and the provision of certificates and confirmations by the directors triggered the endorsement exclusion because they were ‘adjuncts’ to FMC’s professional services.
The court then turned to the issue of how the directors’ claims could be covered under the PI policy, given the D&O exclusion. The trial judge dealt with this issue by construing the general D&O exclusion in the PI policy in light of the more specific endorsement exclusion in the D&O policy. Her Honour found that the latter exclusion had the effect of firstly, ‘deeming’ the provision of the certificates and confirmations by the directors as constituting the performance of professional services by FMC and secondly, deeming the directors to have not been acting in their capacity as directors when providing these things. On this approach, the D&O exclusion in the PI policy did not apply, and the claims were covered under the PI policy’s insuring clause.
In upholding the directors’ appeal, the Court of Appeal noted that the directors’ claims were ones that would normally be expected to be covered under a D&O policy and they found that they were in fact covered in this case. Their Honours found that the directors were performing duties that were personal to them (and not FMC) and TE’s claims against the directors could only have been made out against the directors (and not FMC). It follows from this that the Court of Appeal was also not satisfied that the provision of directors’ certificates and communications were adjuncts to FMC’s professional services.
The Court of Appeal also expressed concerns that the trial judge’s interpretation was at odds with the principle that exclusion clauses should be read down in favour of cover where ambiguity exists and could render a D&O policy useless if everything done by a director could qualify as an adjunct to the performance of the company. Having made these findings, it logically followed that the endorsement exclusion in the D&O policy did not apply and the D&O exclusion in the PI policy would prevent recovery under the PI policy. The directors’ claims were covered under the D&O policy.
In our view, the Court of Appeal’s decision represents a sensible and pragmatic approach to resolving the issue. However, the decision is a timely reminder of the importance of clearly drafted insuring and exclusion clauses and, where appropriate, the need for insurers, brokers and insureds to duly consider the potential overlap and interplay between D&O and PI policies. The decision is also consistent with the Australian experience, as confirmed in the Full Federal Court of Australia decision of Chubb Insurance Company of Australia Limited v Robinson  FCAFC 17.