ARC Capital Partners Limited v Brit Syndicates Limited and QBE Underwriting Limited1
29 January 2016
The Commercial Court has considered the application of a retroactive date exclusion in a professional indemnity policy. The Court applied a commercial approach to the interpretation of the policy wording and, in particular, provided guidance in relation to the meaning of the phrases “acts, errors or omissions” and “claims arising from or in any way involving…”
Facts of the Case
On 15 August 2014, ARC Capital Holdings Limited (the “Fund“), issued proceedings againstARC Capital Partners Limited (the “Manager“) in relation to an allegedly negligent business investment it entered into on behalf of the Fund in December 2010. The Manager notified its insurers in January 2014. The Manager had the benefit of professional indemnity insurance for the period 23 October 2013 to 23 October 2014. The insurance was provided by five different insurers, including the Defendants as second excess layer insurers (the “Policy“). The Manager also entered into previous consecutive annual contracts of insurance on similar terms beginning on 5 June 2009.
The primary policy wording (to the terms of which the Policy was subject) stated that the insurers shall pay the loss which the insured is legally liable to pay on account of any ‘Professional Services Claim’ first made against the ‘Insured’ during the Policy period for a Wrongful Act occurring either before or during the Policy period.
The term “Wrongful Act” was defined in the primary policy as meaning “any act or omission, including but not limited to, any error, misstatement, misleading statement, neglect, breach of duty or breach of trust committed or attempted, by an Insured…while performing or failing to perform Professional Services…”
Also, the Policy contained the following Retroactive Date Clause:
“This Broker Insurance Document shall not indemnify the Assured against any claim and or claims arising from or in any way involving any act, error or omission committed or alleged to have been committed prior to 5 June 2009”.
The 5 June 2009 date (the “Retroactive Date“) was the date of inception of the Policy.
The basis for the Fund’s professional negligence claim against the Manager was in relation to the Manager’s alleged breaches of contract and/or duty in relation to making and releasing an investment of RMB 480 million (approximately US$75 million) to Orient Home Group (“OHG”), a property business, on behalf of the Fund, without putting in place any escrow arrangement or obtaining any security for the performance by OHG of its obligations under the relevant investment agreement, or for the repayment of the investment. OHG subsequently failed to repay the investment. Such allegations all related to events which occurred in 2010.
The Fund put forward an alternative case in the event the Manager was found not to have acted in breach as set out above, claiming that the Manager was also in breach by concluding a Capital Injection Agreement in 2008 at a time when they should not have done so. By entering into the Capital Injection Agreement, it was alleged that it exposed the Fund and the companies it owned, to claims that the Fund was bound to complete the earlier 2008 agreements.
To summarise, in relation to their primary case, the Fund did not allege any wrongful act against the Manager before the Retroactive Date. However, in relation to its alternative case, it did.
Considerations of the Court
The Commercial Court considered, amongst other things, whether the Fund’s claim against the Manager was a claim which fell to be excluded under the Retroactive Date Clause in the Policy.
The Court considered the commercial context of the Policy when interpreting the Retroactive Date Clause. It was agreed between the parties that the Retroactive Date was the date when the Defendants first came on risk, and therefore the object of the Retroactive Date Clause was to exclude any matters of liability which arose before the Retroactive Date.
In particular, the Court considered the meaning of the following wording found within the Retroactive Date Clause:
- “any act, error or omissions”; and
- “arising from or in any way”.
“Acts, errors or omissions”
The Defendants argued that the phrase “acts, errors or omissions” in the Retroactive Date Clause was different to the term “Wrongful Act” (a term used in the insuring clause as mentioned above). The Court held that since the definition of a “Wrongful Act” included “any act or omission, including but not limited to, any error…” the wording in the Retroactive Date Clause should be interpreted in the same way, i.e. matters which include culpable action that is capable of giving rise to liability.
“Claims arising from or in any way involving”
However, when considering the causal connection, the Court reflected on the meaning of the phrases “arising from” and “in any way involving” in the Retroacting Date Clause. The Court held that they each had a distinct meaning, and that “arising from” should be taken to mean“proximately caused by” or “directly caused by” and “in any way involving” should be taken to mean “indirectly caused by”.
Importantly, the Court considered that “a line must be drawn somewhere” in relation to what could be classed as an indirect cause of a claim. The historical context or background is not enough to give rise to a liability which occurs before the Retroactive Date – there must be an act, error, or omission which is genuinely part of a chain of causation which leads to the liability.
The Court was, therefore, of the view that in respect of the Fund’s primary case, there was no complaint about any wrongful act before the Retroactive Date. Furthermore, the earlier factors (i.e. the alleged wrongful acts that took place in 2008) merely represented the background and historical context to the alleged wrongful acts that occurred in 2010. Accordingly, the Court held that the exclusion in the Retroactive Date Clause did not bite.
The case provides a useful demonstration of the Court’s commercial approach to the interpretation of a policy and its attempts to construe the contractual language in the light of the objective of the contract in question.