Auckland Trotting Club Incorporated v Lane Neave
[2022] NZHC 2208
•31 August 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-002011
[2022] NZHC 2208
BETWEEN AUCKLAND TROTTING CLUB INCORPORATED
PlaintiffAND
LANE NEAVE
First Defendant
VERO LIABILITY INSURANCE
LIMITED as insurer of N-Compass Limited (in liquidation)
Second Defendant
VERO LIABILITY INSURANCE
LIMITED as insurer of Max Russell Consultancy Limited
Third Defendant
Hearing: 17 May 2022 Appearances:
M Black and L M Wallace for the Plaintiff
J Stafford for the First Defendant (observing)
J Bierre and L G Cox for the Second Defendant N Kim for the Third Defendant (observing)
Judgment:
31 August 2022
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 31 August 2022 at 4.00 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
AUCKLAND TROTTING CLUB INC v LANE NEAVE [2022] NZHC 2208 [31 August 2022]
Introduction
[1] Auckland Trotting Club Incorporated (ATC) entered into a construction contract with Canam Construction Limited (Canam) to build a major development at Alexandra Park. N-Compass Ltd (N-Compass) was project manager. Construction disputes arose, culminating in N-Compass leaving the project and ATC cancelling the construction contract. In the ensuing arbitration between ATC and Canam, the arbitrator awarded ATC over $85 million. Before the final award was made, Canam was placed into voluntary liquidation.
[2] One of N-Compass’s responsibilities was to administer the construction contract. The contract required Canam’s parent company to provide a guarantee and indemnity. N-Compass failed to secure the guarantee or inform ATC of that fact before it left the project.
[3] ATC now applies for leave to join Vero Liability Insurance Ltd (Vero) as the insurer of N-Compass (removed from the Companies Register following its liquidation). ATC claims that N-Compass breached the terms of its contract and was negligent. Vero objects to being joined as it says that N-Compass did not have a claim under the insurance policy for any liability arising out of ATC’s claim. That is because the policy contained an exclusion for claims arising directly, indirectly, or in connection with the insolvency of any party involved in the project.
[4] The critical issue to be determined is whether N-Compass had a prima facie claim under the insurance policy for any liability under ATC’s claim.
[5] There is also an issue between the parties as to which policy period applies, and therefore whether Vero has established that the relevant policy contained the exclusion. As it turns out, I do not need to decide this issue and it can be left for the trial.
Background
[6] ATC owns and operates a venue for horse racing in Alexandra Park in Epsom, Auckland. ATC decided to develop a large apartment complex on its land, involving approximately 22,600m² of residential apartments, 5,600m² of retail space and 9,000m² of basement carparking.
[7] Under a written consultancy agreement entered into in early 2014, ATC engaged N-Compass to provide, in broad terms, project management services for the design, construction and commissioning of the development. ATC entered into agreements with Max Russell Consultancy Ltd (Max Russell) and White Associates for engineering and quantity surveying services respectively.
[8] On 16 October 2015, ATC accepted a tender submitted by Canam for the construction of the complex. On 23 October 2015, ATC and Canam signed a construction contract (the Contract) prepared by ATC’s construction solicitors Lane Neave.
[9] The Contract was in the standard form NZS 3910:2013, as amended by special conditions. The special conditions included cl 11.6 (under Schedule 2 — Special Conditions of Contract — Other Conditions of Contract). Clause 11.6 required that Canam provide ATC with a guarantee (the Guarantee) from its parent company, Canam Group Ltd (Canam Group), in the form prescribed in Schedule 4 to the Contract within five working days of the date of acceptance of tender.
[10] The project was fraught with difficulties. Canam’s relationship with ATC and N-Compass broke down. N-Compass departed the project in August 2016. As noted, Canam Group did not provide the Guarantee required under the Contract prior to N-Compass’ departure.
[11]On 19 July 2018, ATC terminated the Contract.
[12] The dispute between ATC and Canam resulted in a lengthy arbitration, with Rodney Hansen QC awarding ATC over $85 million across three awards issued between May 2021 and March 2022.
[13] In his interim award of 18 May 2021, the arbitrator held that Canam was obliged to procure the Guarantee from Canam Group. He declined however to order specific performance on the basis of a statement from Canam/Canam Group director Mr Petrou that Canam Group would provide the Guarantee if the arbitrator found that Canam was obliged to procure the same. Canam Group still did not provide the Guarantee and so on 10 August 2021 the arbitrator made an order for specific performance against Canam, requiring it to procure the Guarantee from Canam Group. Canam was placed into liquidation on the same day by resolution of shareholders, leaving outstanding the debt owing to ATC pursuant to the arbitration. Canam Group remains a registered company.
[14] On or about 20 October 2021, ATC issued these proceedings alleging that Lane Neave, N-Compass (in liquidation), Max Russell and White Associates were responsible for the Contract proceeding without the Guarantee being obtained from Canam Group.
[15] On 30 November 2021, ATC brought this application seeking leave to commence proceedings against Vero (as the insurer of N-Compass), N-Compass having held a professional indemnity insurance policy issued by Vero. The policy had a renewal date of 31 August each year and, as with most professional indemnity policies, was a ‘claims made and notified’ policy. This meant that the policy was triggered when a claim which met the requirements of the operative clause was made against N-Compass and notified to Vero. ATC had formally put N-Compass on notice of a potential claim on 12 February 2019.
Legal principles — leave to commence proceedings
[16]Section 9(1) and (4) of the Law Reform Act 1936 provides:
9 Amount of liability to be charge on insurance moneys payable against that liability
(1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the passing of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.
…
(4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court.
[17] In Ludgater Holdings Ltd v Gerling Australia Insurance Company Pty Ltd, the Supreme Court considered the rationale behind s 9 and the development of the section.1 It observed that s 9 and its predecessor responded to “the obvious unfairness in the denial by the common law of priority for an injured plaintiff’s claim to insurance proceeds received by or payable to an insolvent insured defendant.”2
[18] Section 9(4) is concerned with how the charge created by s 9(1) is to be enforced against the insurer. The provision requires a party seeking to enforce the charge to obtain the leave of the Court to commence proceedings. The purpose of the leave requirement is to prevent a plaintiff from taking unnecessary or inappropriate proceedings against the insurer. If the insured is insolvent before the happening of the event giving rise to the claim for damages or compensation, leave is not required.3
[19] It is common ground between the parties that the Court must be satisfied of three matters before it will grant leave under s 9(4):4
(a)there is a prima facie claim against the insured;
1 Ludgater Holdings Ltd v Gerling Australia Insurance Company Pty Ltd [2010] NZSC 49 at [14]– [26]. See also Law Commission Some Insurance Law Problems (NZLC R46, 1998) at ch 9.
2 At [14].
3 Law Reform Act 1936, s 9(2).
4 Chow v Thomson HC Auckland CIV-2009-404-4765, 15 March 2012 at [13]; as cited recently by this Court in Minister of Education v McKee Fehl Constructors Ltd [2018] NZHC 1177 at [24]; Heale v IAG New Zealand Ltd [2019] NZHC 2829 at [54].
(b)the insured has a prima facie claim under the insurance policy; and
(c)the insured is not “a perfectly good common law defendant”.
[20] The onus is on the plaintiff to make out a reasonably arguable case; but this is not a high threshold.5
[21] Associate Judge Faire in Clark's Pacific Ltd v Trucks & Trailers Ltd expressed the view that an application under s 9(4) should be dealt with in a similar way to an application for strike-out. That is, facts pleaded against the proposed defendant should generally be taken as true and the claim should not be rejected unless it is clearly untenable, or frivolous, vexatious and an abuse of process. 6
[22] The Court has a general discretion to grant or refuse leave. However, if the insurer clearly has a “cast-iron” defence to the proposed claim under the insurance policy, the Court may decline to grant leave.7 Where there is any doubt as to whether the defence will succeed, leave to proceed against the insurer should be granted and the issue can be argued at trial.8
Did N-Compass have a prima facie claim under the insurance policy?
[23] The only issue in this application is the requirement at [19](b) above, namely whether N-Compass had a prima facie claim under the insurance policy.
5 Plastic Recoveries & Manufacturing Ltd v Wright Machinery Ltd HC Auckland CP1131/86, 30 April 1991 at 6–7; and FAI (NZ) General Insurance Company Ltd v Blundell and Brown Ltd [1994] 1 NZLR 11 (CA) at 2.
6 Clark's Pacific Ltd v Trucks & Trailers Ltd HC Auckland CIV-2016-404-3033, 20 April 2007 at
[19] –[21]; and Chang v Lumley General Insurance (NZ) Ltd HC Auckland CIV-2009-404-7820, 23 August 2010.
7 Registered Securities Ltd (in liq) v Brockett HC Christchurch CP293/87, 17 October 1991 at 8; Body Corporate 195843 v North Shore City Council [2011] 2 NZLR 222 (HC) at [34], as cited recently in Body Corporate 368533 v Napier City Council [2016] NZHC 1470 at [48].
8 AFG Insurances Ltd v Andjelkovic (1981) 1 ANZ Insurance Cases 60-443 (FCA). The New Zealand Court of Appeal took the same view in State Insurance General Manager v Maaka
(1989) 5 ANZ Insurance Cases 76,161 (CA).
[24] Vero says that N-Compass did not have such a claim because ATC’s claim against N-Compass falls within the Project Manager's endorsement in the policy schedule which provides:
In respect of the Insured's project management activities, it is agreed that the policy is amended to include the following additional exclusion:
The Company will not indemnify the Insured for any claim arising directly or indirectly or in connection with:
…
6. the insolvency of any party involved in any project; …
[25] The parties disagree as to which period ATC’s claim falls to be dealt with under. ATC contends that the relevant policy period runs from 2 November 2015; the last day by which the Guarantee was to be provided. Further, it says that Vero has not adduced evidence of the policy for that period showing that it contained the Project Manager endorsement. Vero contends that the relevant policy period is 2017-2018 or 2018- 2019, when ATC first made inquiries about the Guarantee; and then put N-Compass on formal notice of a claim. Vero has adduced in evidence the policies for these periods. They contain the Project Manager endorsement.
[26] I will first examine whether N-Compass would have had a prima facie claim against the insurance policy, assuming the policy contains the endorsement. If the answer to that is yes, nothing turns on the issue raised by ATC about the policy period for the purposes of this leave hearing.
[27] Vero’s position is that the requisite nexus exists between ATC’s pleaded claim against N-Compass and the insolvency of Canam, and therefore the insolvency exclusion applies and there is no prima facie claim under the policy.
[28] In support of this position, Vero advances three principal submissions. First, it says that while the words “arising directly or indirectly” or “in connection with” require a “real and substantial connection” between the excluded matter and the claim/loss, it is not necessary that the excluded matter be the direct or proximate cause of the claim/loss.
[29] Vero relies on the leading decision of the Court of Appeal in AMI Insurance Ltd v Legg.9 That case concerned the application of an exclusion in a public liability policy which stated that there was no cover for liability “arising out of or in connection with any … profession, business or trade not directly connected with your farming”. The Court prefaced its analysis of the phrase “in connection with” by observing that the phrase is one of intrinsically indefinite meaning, which must take its meaning from the context supplied by a given policy and set of circumstances.10 It went on to state that while “arising from” plainly signifies causation, “in connection with” may have a “different and less direct” meaning.11
[30] The Court referred to its earlier decision in IAG New Zealand Ltd v Jackson on which the trial Judge had relied, in which it held that the phrase “in connection with” demands “some causal or consequential relationship between the two things in this setting”.12 It also referred to the elaboration of this statement by Miller J (who had delivered the Court of Appeal's judgment in Jackson) in JCS Cost Management v QBE Insurance (International) Ltd:13
… On reflection, 'consequential' may mislead. The term is apt if it is taken to mean, as we did, a connection that need not be causal but which the court decides is of sufficient consequence or significance in the circumstances of the case. Not every temporal or other connection will do. Derrington and Ashton describe the necessary connection as a "discernible and rational link," and greater precision may not be possible in the abstract.
[31] Although Miller J’s judgment in JCS was a dissenting one, the Court in Legg held that his comments on the meaning of “in connection with” were consistent with the majority judgment.14
[32] However, the Court said that it does not follow that the trial Judge was wrong to find causation was required by that policy and the circumstances of the case. It quoted its earlier statement in Jackson:15
9 AMI Insurance Ltd v Legg [2017] NZCA 321, [2017] 3 NZLR 629.
10 At [22].
11 At [24].
12 At [25].
13 At [26].
14 At [29].
15 At [30].
The phrase “in connection with” plainly requires a nexus between one thing and another, but the nature and closeness of the required connection always depends on context and purpose.
[33] Second, Vero relies on three authorities concerning the application of insolvency exclusions in liability policies. In Hall v FP North Ltd (in liq), a company of financial advisors who had been instructed to select a conservative investment portfolio for their client had invested in fixed interest securities offered by 10 companies, all of which subsequently went into receivership or had moratoria placed on invested deposits.16 The client commenced proceedings alleging negligence by the financial adviser. The financial adviser's professional indemnity claim was declined by its insurer based on a policy exclusion which removed cover for claims “relating directly or indirectly, attributable to or in consequence of the insolvency of any financial institution or fund manager”.
[34] In considering whether s 11 of the Insurance Law Reform Act 1977 would save the claim, the Associate Judge rejected the client’s submission that the broker’s liability arose out of its failure to act on the client’s instruction and its loss was caused by that failure rather than the insolvency of the financial institutions or depreciation of the investment. The Associate Judge held that the loss in value of the investments was integral to the client’s claim and would determine the amount for which the broker was liable on a finding of breach of contract or negligence. As a result, the loss for which the insurer would be obliged to indemnify the insured was necessarily caused or contributed to by the insolvency of the financial institutions or depreciation of the investments.
[35] Next, Vero relies on a decision of the Supreme Court of New South Wales, Quintano v BW Rose Pty Ltd.17 The defendant had, through its insurance broker, placed public liability insurance with International Unity, an insurer registered in the Solomon Islands. International Unity subsequently went into liquidation, leaving a valid claim by the defendant unpaid. The defendant brought a third party claim against its broker alleging that it had negligently placed the insurance with an unregistered overseas insurer and failed to advise on the associated risks. The broker’s professional
16 Hall v FP North Ltd (in liq) (2010) 16 ANZ Insurance Cases 77,946.
17 Quintano v BW Rose Pty Ltd [2008] NSWSC 793.
indemnity policy included a provision excluding cover for claims arising out of the insolvency of any insurer, or any breach of the insured's duty to advise on the suitability (including financial standing) of any insurer. The insurer declined the claim on the basis that it arose out of International Unity's insolvency.
[36] The Supreme Court upheld the insurer’s decision to decline, finding that the words “arising from” required some causal connection between the claim and the specified matter, but the requisite nexus was satisfied by a less proximate relationship than that required by the phrase “caused by”. The Court said that “a claim can be said to arise from a matter — at least — if it has a foundation in that matter, so that the matter is one of the underlying facts that, if they exist, together justify the claim”.18 The Court concluded:19
Damage is the gist of an action in negligence. Plainly, the damage asserted by BWR was that it was left without indemnity of value . . . [The] reason BWR was left without indemnity of value was that International Unity was insolvent. In substance BWR's claim against [the broker] was for loss it would suffer, if judgment on Mr Quintana's claim went against it, because it was practically uninsured - which situation was attributable to International Unity's insolvency The Loss that was the gist of BWR's claim was, as a matter of
fact, attributable to International Unity's insolvency… BWR’s claim… originated in, sprang from, or had its foundation in, the insolvency of International Unity.
[37] Finally, Vero relies on the decision of High Court of England and Wales in Crowden v QBE Insurance (Europe) Ltd.20 The plaintiffs ran a self-administered pension scheme and had engaged the services of a financial adviser to provide investment advice. They claimed that the advice provided in respect of two financial investments was negligent. As to the first, the issuer of the bond had defaulted and then went into administration six days later. As to the second, the issuer of the security was Lehman Brothers Inc which went into Chapter 11 protection.
[38] The financial adviser's insurance policy contained a provision excluding cover for “any claim, liability, loss, costs or expenses arising out of or relating directly or
indirectly to the insolvency or bankruptcy of any other business, firm or company
18 At [8].
19 At [10].
20 Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm).
with whom the Insured has arranged directly or indirectly any insurances, investments or deposits.”
[39] The Court rejected the submission that the exclusion did not apply on the basis that the cause of the claim, liability or loss was the financial adviser's negligence:21
Of course, any such negligence ... giving rise to a liability must exist for the Insolvency Exclusion even to be considered, because without such liability ... there would be no prima facie cover under [the operative clause] … The question is, for the purposes of the Insolvency Exclusion, whether the relevant insolvency was a cause of the claim, liability or loss, even if it operates in combination with [the financial adviser's] own negligent liability.
[40] The Court held that the exclusion plainly applied as the insolvency of the respective issuers was the only cause of the loss. In each case, it was the inability of the issuer to pay their debts as they fell due which gave rise to the relevant claim, loss or liability.
[41] Third, Vero applies the principles from these authorities. It says that ATC’s position that its claim is not connected with the insolvency of Canam because the cause of the claim was N-Compass’s negligence falls into the same trap as the plaintiffs in Crowden.
[42] Vero says that to the contrary, the requisite connection between Canam’s insolvency and the claim can be established because the loss which is the subject of the claim would not have been incurred if Canam had remained solvent. Vero says that if Canam had remained solvent, the obvious next step for ATC after the final arbitration award would have been to enforce the judgment against Canam and recover the monies owed. In that event, Vero says, although the allegedly negligent act by N-Compass would still have occurred, no loss would have resulted from it.
[43] I will now set out my assessment of Vero’s arguments. In doing so, I emphasise that it is only necessary for ATC to establish that it has a reasonable argument that N-Compass would have had a valid claim under the policy; that is, that such a claim was not excluded by the insolvency exclusion in the Project Manager endorsement.
21 At [88]–[90].
Unless Vero has a “cast-iron” defence, I should grant ATC leave to join Vero, and the applicability of the exclusion will be resolved at trial.
[44] In terms of Vero’s essential submission at [42], I do not agree that there is not a reasonable counter-argument that ATC suffered loss as a result of N-Compass’s negligence independently of Canam’s insolvency.
[45]Consider the terms of the intended Guarantee:
2.2 Primary obligations
The Guarantor:
(a) as primary obligor and not merely as a surety or guarantee only, guarantees to the Principal the due and performance by the Contractor of each and all of the obligations, warranties, duties and undertakings of the Contractor under the Contract when and if such obligations, warranties, duties and undertakings become due and performable pursuant to the terms of the Contract; and
(b) as a primary obligation, agrees in addition to its obligations set out in clause 2.2(a) to indemnify the Principal on demand against any loss, damage, cost, expense and/or liability suffered or incurred by the Principal by reason of:
(i) any breach by the Contractor of any of its obligations, warranties, duties and/or undertakings under the Contract;
(ii) an obligation the Guarantor would otherwise have under clause 2.2(a) of this deed being found to be void, voidable or unenforceable; and
(iii)the Contractor becoming subject to an Insolvency Event.
….
2.5 Liability
This deed is a primary obligation of the Guarantor. The Principal is not obliged to enforce any other security held by it in respect of the obligations, warranties, duties and/or undertakings of the Contractor under the Contract or to exercise or enforce any distress, diligence or other process of execution against the Contractor. In the event that the Principal brings proceedings against the Contractor, the Guarantor will be bound by any findings of fact as well as any interim or final award or judgment made by an arbitrator or the court in such proceedings. For the avoidance of any doubt, the Principal will not be entitled to double recovery in respect of the same portion of claim and any payments made by the Guarantor under this deed will (subject to clause 2.14) automatically release the Contractor to the extent of such recovery by the Principal from the Guarantor.
2.6Continuing guarantee
This deed is a continuing guarantee and accordingly this deed:
(a)will remain in full force and effect (notwithstanding any immediate satisfaction by the Contractor, the Guarantor or any other Person) until all obligations, warranties, duties and undertakings of the Contractor under the Contract have been satisfied and performed in full; and
(b)is not recoverable and is in addition to and not in substitution for and will not merge with any other right, remedy, guarantee or security which the Principal may at any time hold for the performance of such obligations, warranties, duties and/or undertakings, and may be enforced without first having recourse to any such security.
(emphasis added)
[46] The following features are particularly relevant. First, the parent company guaranteed the performance by Canam of all its obligations; and indemnified ATC for any losses by reason of any breach of the Contract by Canam. This indemnity existed separately to the indemnity against losses caused by Canam’s insolvency; and it applied irrespective of Canam’s solvency. Second, the parent was a primary obligor, meaning that ATC would have been entitled to have direct recourse to Canam Group without having to take action against Canam first or at all. Third, it was a continuing guarantee and indemnity that would have remained in force until all Canam’s obligations were performed in full.
[47] Thus, had the Guarantee been secured, ATC could have called on this Guarantee as soon as Canam was in breach of its obligations under the Contract for all losses caused by those breaches. The Guarantee enabled ATC to access the greater assets of the parent, even if Canam was solvent. ATC’s right to call on the Guarantee would have continued until all losses caused by Canam’s breaches had been recovered.
[48] Had the Guarantee been in place, ATC could have joined Canam Group to the arbitration. Even if it had not, pursuant to cl 2.5, Canam Group would have been bound by the arbitrator’s findings of fact as well as any interim or final award, including the final award of $85 million. This would have been the case even if Canam was solvent.
[49] The proposition that ATC sustained loss independently of Canam’s insolvency is perhaps illustrated by considering the arbitrator’s first interim award. This award was made on 18 May 2021, some three months before Canam was placed into voluntary liquidation on 10 August 2021. The award included a finding that ATC was lawfully entitled to terminate the Contract because of Canam’s defaults. The arbitrator also found under the second cause of action that Canam was liable for loss and damage arising from defective workmanship. He awarded damages for remedying misaligned columns of $906,426 and for remedying defective application of intumescent paint of $1,589,681, and reserved quantification of remaining issues. Had the Guarantee been in place, Canam Group would have been bound by this award and ATC could have sought to recover the damages awarded from it. It could not; and it is difficult to see how this lost opportunity can be attributed to the insolvency of Canam, which had not yet occurred.
[50] There is a further point. The Contract provided that no payment otherwise due under the Contract would become payable until the Guarantee was executed and delivered to ATC.22 Further, if Canam failed to provide the Guarantee within the required timeframe, ATC was entitled to treat the failure as an act of default.23 The arbitrator found that ATC was lawfully entitled to terminate the Contract based on the defaults pleaded in ATC’s fourth cause of action against Canam, including Canam’s failure to provide the Guarantee. Thus, by not informing ATC at the outset that the Guarantee was not in place (a fact that ATC did not realise until after it terminated the Contract), N-Compass denied ATC the opportunity to withhold payment, give notice to terminate the Contract and resume possession of the site. Viewed this way, ATC’s loss could be described as the lost opportunity to terminate the Contract before it had paid substantial amounts to Canam and incurred significant costs, including those associated with the arbitration. There is a credible argument that this ‘loss’ did not arise out of or in connection with the later insolvency of Canam.
[51] Further, the timing of ATC’s notification of its claim against N-Compass arguably lends some support to the proposition that the claim arose independently of the insolvency of Canam. ATC put N-Compass on notice of a claim against it, and
22 Clauses 11.6.2 and 12.1.7(a)(ii).
23 Clauses 11.6.3 and 14.2.1(b).
asked Canam to notify its professional indemnity insurer, on 12 February 2019. This was well before the insolvency of Canam in August 2021.
[52] Care must be taken when applying the insolvency exclusion cases relied on by Vero because they concern different factual scenarios. In Hall and Crowden, the third party’s losses were indisputably caused by the insolvency of the investments. Without the insolvency of the investments, the third party would not have sustained any loss. The court was explicit about this in Crowden, finding that the exclusion plainly applied as the insolvency of the respective issuers was the only cause of the loss. Further, these events of insolvency precipitated the claimant’s losses.
[53] That was also the case in Hall. It was the insolvency of the financial institutions or depreciation of the investments that precipitated the client’s claim. But for the loss in value of the investments, the client would not have had any claim as they would not have sustained any loss.
[54] In the present situation, the catalyst for the claim was ATC becoming aware that an essential element of N-Compass’s contracted services had not been performed, exposing ATC to loss and denying it the opportunity to mitigate its exposure by demanding a guarantee from Canam Group and/or terminating the Contract with Canam and engaging an alternative contractor. Unlike the failed investment situation, there is an argument that irrespective of, and well before, Canam’s insolvency ATC was deprived of something of value by N-Compass’s omission.
[55] Quintano is perhaps closer to the current situation. The insured claimed their ‘damage’ was being left with an indemnity with no value. Similarly, it could be argued that ATC’s ‘loss’ was being left without the intended guarantee or indemnity from Canam Group. Yet in Quintano, the court concluded that the insolvency exclusion applied because the reason the indemnity had no value was the insolvency of the insurer. The same cannot be said here. The lack of the intended contractual right to call on the parent company was not caused by the insolvency of Canam.
[56] I acknowledge that some of these points depart from the claim as currently pleaded by ATC. I also do not overlook that ATC pleads its loss as “loss and damages
for the sum of…and resulting from Canam now being in liquidation, as referred to in its proof of debt, and further loss and damages”. However, as noted by the court in Quintano:24
… the craftiness or clumsiness of a claimant’s pleading is not determinative of the characterisation of the claim for the purposes of the professional indemnity policy. Both parties accept that whether a claim falls within an exclusion depends on the facts that give rise to the claim, and not its formulation by the claimant.
[57] Furthermore, the purpose of this decision is only to determine whether ATC has a credible argument such that it should be granted leave to proceed against Vero. I conclude that it has. Inevitably, the parties will develop and refine their respective pleadings for the purposes of trial.
Result
[58] I grant Auckland Trotting Club Incorporated leave to commence proceedings against Vero Liability Insurance Limited as insurer of N-Compass.
[59] In accordance with the usual principle that costs follow the event, Vero will pay ATC’s costs on a 2B basis and reasonable disbursements. I expect that counsel will be able to agree the amount. If they are unable to agree, ATC should file a memorandum of no more than three pages within 20 working days. Vero should file any memorandum within a further 10 working days.
Associate Judge Gardiner
Solicitors:
Gilbert Walker, Auckland McElroys, Auckland Morgan Coakle, Auckland
24 Quintano v BW Rose Pty Ltd [2008] NSWSC 793 at [9].
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