The interplay between D&O and PI policies for professional service companies is often less than straightforward. Covergae issues arise where a director has been involved in the provision of professional services and is then the subject of a negligence claim. This article looks at the recent decision of the New Zealand High Court which has considered some of the frequently seen issues.
The trustee (TEL) of an investment fund brought proceedings against the fund managers (FMC). FMC’s role was to manage TEL’s investment portfolio. Its role was governed by a number of documents including a deed entered with TEL. Under the deed, FMC covenanted to provide quarterly certificates to TEL certifying that the fund was being properly managed.
The fund collapsed in 2008 and TEL issued proceedings against FMC alleging that the FMC directors had breached their duties by failing to adequately investigate the issues informing the quarterly certificates.
FMC sought cover under their D&O and PI policies.
The D&O policy provided no entity cover and contained two relevant terms:
- a general exclusion which carved out loss attributed to the provision of professional services of any kind “other than the services provided in an Insured Person capacity” to FMC; and
- by endorsement, an exclusion in respect of loss arising from FMC’s performance of professional services for others for a fee.
D&O Insurers successfully argued that the TEL claim was excluded by virtue of the endorsement. The Court held that the endorsement expanded the general exclusion and limited cover where the provision of quarterly certificates was an adjunct to the professional services FMC provided to TEL (and for which it was paid). The Court concluded that it was difficult to see a basis on which this endorsement was not engaged.
The Court was not persuaded that the endorsement effectively “swallowed” the entire policy where all activities undertaken by FMC were for the purposes of fund management - there was still cover for regulatory breaches (amongst others).
The Court also considered the interplay between the D&O and PI policy (issued by the same Insurer). The PI policy contained an exclusion for claims “brought against an Insured as a director, officer or equivalent executive” The Court considered that the corollary of its conclusion under the D&O policy was that FMC’s directors were not themselves providing professional services but were acting in their capacities as directors of FMC, and as such the exclusion in the PI policy would also apply.
This, the Court held, could not be countenanced. As such the Court held that the provision of quarterly certificates by FMC was a professional service (and therefore excluded under the D&O policy) but, also, that the FMC directors were not acting in their capacity as such when they provided the certificates (and therefore the exclusion in the PI policy was not engaged).
The Court effectively approached policy interpretation as though the D&O and PI policies were effectively one document. This is unusual and potentially problematic. While both policies were issued by the same insurer, they each contain their own terms on which a claim should be assessed on the merits of that particular wording.
Using the D&O policy as an interpretive aid broadens previous obiter comments of the Court of Australia that other policies issued by the same insurer “may” be of assistance. It remains to be seen whether this decision will be upheld (or appealed) and, if so, the impact it has on the market. If it is upheld, there may be considerable benefits to insureds obtaining cover from the same insurer for their suite of policies. Insurers, in turn, will need to make sure that their wordings sit back to back so cover across policies is interpreted according to the underwriting intention.
To read the judgment click here.