Fund Managers Canterbury Limited v AIG Insurance New Zealand Limited
[2017] NZCA 325
•28 July 2017 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA518/2016 [2017] NZCA 325 |
| BETWEEN | FUND MANAGERS CANTERBURY LIMITED ALEXANDER DONALD MCBEATH, PAUL ERNEST MCEWAN, ALAN WILLIAM PRESCOTT, GEOFFREY READ THOMAS, ANDREW HENDRA YOUNG AND OLIVER RODERICK MATSON |
| AND | AIG INSURANCE NEW ZEALAND LIMITED |
| Hearing: | 18 July 2017 |
Court: | Harrison, French and Gilbert JJ |
Counsel: | N A Till QC and D R Weatherley for Second Appellants |
Judgment: | 28 July 2017 at 11.00 am |
JUDGMENT OF THE COURT
A The appeal is allowed. The answer to the preliminary question is “no”.
B The respondent must pay the second appellants costs for a standard appeal on a band A basis and usual disbursements.
C The award of costs in favour of the respondent in the High Court is set aside. Costs in the High Court are to be dealt with in the High Court in light of the result of this judgment.
__________________________________________________________________
REASONS OF THE COURT
(Given by Gilbert J)
Introduction
This appeal is from the determination by the High Court of a preliminary question.[1] It concerns two Chartis CorporateGuard insurance policies, both underwritten by AIG Insurance New Zealand Ltd: a Directors’ and Officers’ Liability policy (the D&O policy) and a Professional Liability for Financial Institutions policy (the PI policy). The issue is which of the two policies responds to claims that have been made by Trustees Executors Ltd against the second appellants (the directors) as directors of the first appellant, Fund Managers Canterbury Ltd. The High Court found that the PI policy responds. The directors claim that they are entitled to the significantly greater cover available under the D&O policy.
Trust Deed
[1]Trustees Executors Ltd v Fund Managers Canterbury Ltd [2016] NZHC 2194, [2017] Lloyd’s Rep IR 128 [High Court judgment].
Fund Managers Canterbury, as manager, entered into a Trust Deed with Trustees Executors, as trustee for unitholder investors, to manage a contributory mortgage investment fund on their behalf. Fund Managers Canterbury was obliged to invest the fund in authorised investments in accordance with an investment policy and agreed mortgage investment guidelines.
Directors’ certificates
In terms of the Trust Deed, Fund Managers Canterbury was obliged to provide Trustees Executors with quarterly certificates signed by two of its directors (the directors’ certificates), on behalf of all of the directors, certifying various matters to the best of their knowledge and belief after having made all due enquiries. The matters to be certified included whether or not Fund Managers Canterbury had complied with all of the terms of the Trust Deed during the relevant quarter.
Directors’ confirmations
In terms of the investment guidelines, the general manager of Fund Managers Canterbury was required to provide written confirmation to Trustees Executors that each new mortgage investment met stipulated lending criteria. The general manager’s confirmations had to be separately confirmed by at least two directors of Fund Managers Canterbury (the directors’ confirmations).
The claims
Following substantial losses to the fund, Trustees Executors pursues various claims against a number of parties, including claims against Fund Managers Canterbury for breach of its contractual obligations under the Trust Deed, negligence, breach of fiduciary duty and deceit.
Trustees Executors also pursues three causes of action against the directors of Fund Managers Canterbury. The first is for negligence in preparing and providing the quarterly directors’ certificates in terms of the Trust Deed. The second is for negligence in preparing and providing directors’ confirmations to Trustees Executors that each new mortgage investment met stipulated lending criteria. The third cause of action is for misleading and deceptive conduct in breach of s 9 of the Fair Trading Act 1986 and is based solely on the directors’ certificates and the directors’ confirmations.
D&O policy
The operative insuring clause under the D&O policy reads:
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.
The “Company” is defined as the “Policyholder”, which is Fund Managers Canterbury. “Insured Person” includes any past, present or future director of Fund Managers Canterbury. Each of the second appellants is therefore an “Insured Person”. AIG does not dispute that each of the second appellants faces a “Claim” for a “Wrongful Act”. A “Wrongful Act” is defined to mean:
(1) any actual or alleged breach of duty, … breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or other act done by an Insured Person in their capacity as such; or (2) any matter claimed against an Insured Person solely because of their status as such.
AIG accepts that Trustees Executors’ claims against the directors come within this insuring clause in the D&O policy.
The D&O policy contains a number of standard exclusions including an exclusion for claims arising out of the provision of professional services other than those provided by the directors in that capacity to the company:
This policy does not provide cover for Loss or otherwise in connection with any Claim arising out of, based upon or attributable to:
…
Professional to the provision of professional services of any kind, other Services than the services provided in an Insured Person capacity to the Company;
…
AIG originally contended that this exclusion applied to the claims faced by the directors. However, it abandoned its reliance on this exclusion during the course of the hearing in the High Court.[2] AIG accepts that the claims faced by the directors arise out of, are based upon, or are attributable to services provided by the directors in that capacity to Fund Managers Canterbury. This must be right. The certificates and confirmations were provided by the directors, in their capacity as directors, to Fund Managers Canterbury. They were “services provided in an Insured Person capacity to the Company” within the words of the exception to the professional services exclusion. The certificates and confirmations were then passed on to Trustees Executors by Fund Managers Canterbury in accordance with its obligations under the Trust Deed.
[2]High Court judgment, above n 1, at [58].
In support of its contention that the D&O policy does not respond to the claims against the directors, AIG now solely relies on the following endorsement to the policy (Endorsement 005):
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.
Provided, however, that the foregoing exclusion shall not be applicable to any derivative or shareholder class action claims against Directors or Officers alleging a failure to supervise those who performed or failed to perform such professional services.
AIG contends that this exclusion applies because the claims against the directors arise out of, are based upon, or are attributable to Fund Managers Canterbury’s performance of professional services for Trustees Executors for a fee.
PI policy
The PI policy provides cover for “Claims” against the “Insured” reported to the “Insurer” during the policy period. “Insured Person” is defined to include any natural person whilst an executive of an Insured Company. “Insured Company” includes the policy holder, Fund Managers Canterbury. The directors are therefore “Insured Persons” under this policy. “Claim” means a claim for damages as a result of a “Wrongful Act”. A “Wrongful Act” includes a “Breach of Duty” which in turn is defined to include a breach of duty, act, error, omission, or misstatement in the performance of or failure to perform “Professional Services” by any Insured. “Professional Services” includes the financial services of Fund Managers Canterbury declared in the proposal form submitted to AIG at the policy’s inception, pursuant to an agreement with a customer or client for compensation, or in conjunction with services rendered for compensation. Fund Managers Canterbury declared in its proposal form that it derived 100 per cent of its revenue from fund management and that it managed only one account.
The PI policy contains a standard exclusion for claims brought against an Insured as a director or officer:
This policy does not provide cover in connection with any Claim:
…
Director or Officer brought against an Insured as a director, officer or equivalent executive;
…
AIG contends that this exclusion is intended to “dovetail” with the D&O policy and excludes claims covered under that policy. Ms Challis submits that the claims excluded under the PI policy would be those “relevant to the director’s appointment as such, but would not extend to claims against a director when carrying out professional services for a fee”. By way of example, she argues that claims against the directors for breach of their duties under the Securities Act 1978 would be covered under the D&O policy but excluded under the PI policy. Ms Challis submits that because the directors’ certificates and confirmations were an integral part of the professional services Fund Managers Canterbury provided to Trustees Executors for a fee, they are excluded by the endorsement in the D&O policy. On that basis, AIG contends that the claims brought by Trustees Executors against the directors are covered under the PI policy, not the D&O policy.
Preliminary question
By agreement of the parties, Williams J ordered that the following preliminary question, directed at whether the endorsement to the D&O policy (quoted in [11] above) applies, be determined before trial pursuant to r 10.15 of the High Court Rules:[3]
Does the giving of the certificates and confirmations … constitute “the performance of professional services for others for a fee, or any alleged act, error or omission thereto.”
High Court judgment
[3]Trustees Executors Ltd v Fund Managers Canterbury Ltd HC Wellington CIV-2014-485-4040, 22 February 2016 [Minute and directions of Williams J].
Ellis J answered the preliminary question “yes”.[4]
[4]High Court judgment, above n 1, at [84].
The Judge observed that there is a distinction for the purposes of the endorsement between claims based upon or attributable to “the Company’s … performance of professional services for others for a fee” and “an Insured’s performance of professional services for others for a fee”.[5] The Judge held that the present claims cannot be characterised as falling within the latter category because there was no contractual or client relationship between the directors and Trustees Executors.[6] We agree. In providing the certificates to Fund Managers Canterbury, the directors were not themselves providing professional services to Trustees Executors, nor did they receive a fee for doing so. AIG does not challenge this conclusion and it does not rely on this part of the endorsement.
[5]At [69].
[6]At [70].
However, the Judge concluded that the endorsement operates to exclude the claim from cover under the D&O policy because the provision of the certificates and confirmations were “adjuncts” to the provision of professional services by Fund Managers Canterbury to Trustees Executors and it was paid a fee for these services. Because of its central importance to the appeal, we set out the Judge’s reasoning:
[71] Whether the provision of the certificates and confirmations falls within [the Company’s performance of professional services for others for a fee] is more difficult. Under this part of the Endorsement it would not seem to matter whether the acts of issuing the certificates and confirmations themselves constitute the provision of professional services. Rather, the issue becomes whether those acts can be regarded as adjuncts to (arising out of, based on or attributable to) the provision of professional services by [Fund Managers Canterbury] itself to a third party ([Trustees Executors Ltd]). Thus it seems that Endorsement 005’s effective incorporation of acts associated with the performance of [Fund Managers Canterbury’s] functions is the principal way in which it expands the general exclusion, and reduces coverage, under the policy.
[72] If that is correct then the questions become:
(a) to which of [Fund Managers Canterbury] activities can the provision of the certificates and confirmations properly be said to be an adjunct; and
(b) does the performance of those activities involve the provision of professional services (to a third party for a fee)?
…
[74] … on my reading of the Endorsement it would suffice to show that the certificates and confirmations were provided as an adjunct to the performance of a wider professional service by [Fund Managers Canterbury] for a third party for a fee, namely fund management services provided to [Trustees Executors].
[75] If I am correct in that analysis then it is difficult to see how the provision of certificates and confirmations would not be excluded from cover by the Endorsement. It seems to me that the purpose of both the certificates and the confirmations was to provide both direct and indirect assurance to [Trustees Executors] that the Fund was being properly managed and, presumably, to facilitate [Trustees Executors’] own monitoring function. The provision of assurance as to the quality of the service being provided seems to me to be part and parcel of the service itself. And if that is so then the fee received by [Fund Managers Canterbury] from [Trustees Executors] for fund management would constitute the requisite payment in terms of the Endorsement.
(Footnote omitted.)
Having reached this conclusion, the Judge expressed two reservations about it. The first was that because Fund Managers Canterbury’s sole function was to manage the fund, everything done by the directors could qualify as “an adjunct to the performance by [Fund Managers Canterbury] of its fund management role”.[7] The Judge expressed concern that her interpretation would therefore mean that the exclusion in the endorsement “effectively ‘swallows’ the whole policy”.[8] This would be contrary to the principle that exclusion clauses should not be construed so as to exclude all cover under the policy.[9]
[7]At [77].
[8]At [77].
[9]Citing Great American Insurance Co v Geostar Corporation 81 Fed R Evid Serv 771 (USDC ND MI 2010) at [10].
The Judge considered that this concern was answered by AIG’s submission that the D&O policy might cover claims of a regulatory nature for breaches of the Companies Act 1993, the Securities Act or under the Inland Revenue statutes, or claims by potential investors, unitholders, prospective mortgagors and actual mortgagors who also receive services from Fund Managers Canterbury and pay a fee for those services.[10]
[10]High Court judgment, above n 1 at [78].
The Judge’s second concern about her conclusion was that in providing the certificates and confirmations the directors were acting in their capacities as directors and officers of Fund Managers Canterbury. For that reason, the claims would appear to be excluded from cover under the PI policy. However, the claims would also be excluded under the D&O policy because, on the Judge’s reasoning, the effect of the endorsement is to “deem” those acts to be professional services performed by the company for a fee. This would leave the directors with no cover for the claims under either policy:
[81] The rather more troubling point is this. The upshot of my reasoning above is that, in providing the certificates and confirmations, the directors … were not themselves providing professional services, and were acting in their capacities as directors and officers of [Fund Managers Canterbury]. The effect of Endorsement 005 is to deem those acts to be professional services because they were performed as an adjunct to (arising out of) the provision by [Fund Managers Canterbury] of professional services to [Trustees Executors]. But if the directors … were, nonetheless, in fact acting as directors and officers of [Fund Managers Canterbury], then the claims against them would also arguably be excluded from cover under the PI policy. As noted previously that policy excludes cover for any claim “brought against an Insured as a director, officer or equivalent executive”.
The Judge stated that this result could not be countenanced.[11] She resolved the problem by interpreting the general exclusion in the PI policy in light of the more specific exclusion in the D&O policy. She concluded that the endorsement in the D&O policy had two “deeming” effects: first, that the provision of the certificates and confirmations by the directors is deemed to constitute the performance of professional services by the company; and second, that the directors are deemed not to have been acting in their capacity as directors of the company in providing them:
[83] In the end, therefore, I think that the general exclusion in the PI policy can and must be interpreted in light of the more specific exclusion in the D&O policy. In other words, the effect of Endorsement 005 is not only to deem that the provision of certificates and confirmations constitutes the performance of professional services, but also to deem that the directors … were not acting in a director and officer capacity when providing them. On that approach (and interpreting the two policies together) they would have cover for the present claims against them under the PI policy.
Grounds of appeal
[11]At [82].
The directors appeal on two grounds. First, they contend that the Judge was wrong to conclude that their provision of certificates and confirmations constituted the performance of professional services by the Company for the purposes of the endorsement in the D&O policy. Second, they contend that the Judge was wrong to conclude that the endorsement in the D&O policy has the effect, for the purposes of the PI policy, of deeming them not to have been acting in their capacity as directors when they provided their directors’ certificates and confirmations.
Analysis
There is no contest that the claims against the directors arising out of their allegedly negligently prepared directors’ certificates and confirmations are covered under either the PI or the D&O policy.
Given that the certificates and confirmations were prepared by them in their capacities as directors of Fund Managers Canterbury (as required under the Trust Deed), one might ordinarily expect that a D&O policy would respond to the claims. Moreover, the PI policy specifically excludes cover for all claims against an Insured acting as a director. In our view, this is clearly such a claim. In what follows all emphases are our own.
Does the exclusion in the PI policy apply?
The relevant exclusion in the PI policy is cast in broad terms and without qualification — “any Claim … brought against an Insured as a director, officer or equivalent executive”. We do not accept Ms Challis’ submission that this exclusion can be read down so that it only excludes cover for certain categories of claims against the directors in that capacity, for example, for breaching the Companies Act, the Securities Act or a revenue statute.
Moreover, there is an inconsistency in AIG’s position. It accepts that the claims fall within the insuring clause in the D&O policy because each is a claim for a Wrongful Act as defined in that policy. A “Wrongful Act” under the D&O policy refers to an act “done by an Insured Person in their capacity as such” or “solely because of their status as such”. It follows, as might be expected, that any claim that comes within the insuring clause of the D&O policy (because it is a claim against the director in their capacity as such or because of their status as such) will be excluded by the standard exclusion clause in the PI policy because it is a claim against the director “as a director”. AIG also accepts that the claims come within the proviso to the standard exclusion in the D&O policy because they relate to services provided “in an Insured Person capacity to the Company”. It seems to us that it follows inevitably from AIG’s (correct) acceptance that the claims come within the insuring clause under the D&O policy and the proviso to the exclusion clause in that policy that the claims must also fall within the scope of the exclusion clause under the PI policy. The wording of the provisions is slightly different but their meaning is the same. This is how the two policies “dovetail” together.
Further, we disagree with the Judge’s conclusion that the endorsement to the D&O policy has the effect of altering the plain intent of the standard exclusion in the PI policy of excluding all claims against an Insured “as a director” by retrospectively “deeming” the directors to have been acting in some other unspecified capacity, but not in their capacity as directors, when they signed the directors’ certificates and confirmations. Clear words would be required to achieve such a radical re‑characterisation of the directors’ actions, particularly if this was to apply to a separate exclusion in a separate policy. The endorsement in the D&O policy does not purport to have any such deeming effect and the word “deemed” (or any derivative of it) is not used. The meaning and intent of the exclusion in the PI policy is clear and is not altered by the endorsement in the D&O policy. It must be given effect according to its terms.
For these reasons, we conclude that the PI policy does not respond to the claims against the directors because the claims fall squarely within the scope of the exclusion clause. In short, the claims are brought against the directors as directors.
Does the exclusion in the endorsement to the D&O policy apply?
Contrary to the Judge’s conclusion, we do not read the endorsement as excluding cover under the D&O policy.
We agree with the Judge that there are two ways for claims to be excluded under Endorsement 005: as claims “arising out of, based upon or attributable to the Company’s … performance of professional services for others for a fee”; and as such claims relating to “an Insured’s performance of professional services for others for a fee”.[12]
[12]High Court judgment, above n 1, at [69].
The claims against the directors are solely based on their certificates and confirmations. The losses claimed from the directors are said to have been caused by Trustees Executors’ reliance on the allegedly negligent misstatements in the directors’ certificates and confirmations. Only the directors could be sued for these allegedly negligent misstatements because they are performing a duty which is personal to them in their capacities as officers of the company. The company is not vicariously liable for the directors’ statements and no claim is made against the company in respect of them. Insofar as the endorsement covers the Insured’s performance of professional services, it does not apply because the directors did not provide these services “for others for a fee”, as AIG accepts.
It follows that if the endorsement applies, it would have to be because the provision by the directors of their certificates and confirmations could be said to arise out of, be based upon, or be attributable to Fund Managers Canterbury’s performance of professional services for Trustees Executors. The Judge found that the endorsement applied because the services provided by the directors were an adjunct to those performed by the company. However, we consider that this literal interpretation is contrary to the context and purpose of the policy.
First, as we have noted, there is no contest that the directors are covered under either the PI policy or the D&O policy. The PI policy contains a clear exclusion of liability for claims brought against directors when they are acting in their capacity as directors, as they clearly were when providing the certificates and confirmations.
Second, because Fund Managers Canterbury was incorporated for the sole purpose of managing this fund for Trustees Executors, everything the directors did for the company could be said, on a wide reading of the provision, to arise out of, be based upon, or be attributable to the company’s services to Trustees Executors. As the Judge observed, this broad interpretation risks depriving the directors of any meaningful cover under the D&O policy for their acts or omissions as directors.
The Judge was persuaded that this was not the case for reasons she set out in the judgment:[13]
In particular, it seems to me that the policy might well cover:
(a) claims of a regulatory nature, for example for breaches of the Companies Act, the Securities Act, or possibly under the Inland Revenue statutes.
(b) claims by potential investors, unitholders, prospective mortgagors and actual mortgagors who also receive “services” from [Fund Managers Canterbury] and, in some instances pay a fee for those services.
(Footnotes omitted.)
[13]High Court judgment, above n 1, at [78].
However, there are difficulties with the Judge’s analysis. Endorsement 003 to the D&O policy specifically excludes cover for claims by any governmental, national or state regulatory agency. While this would not exclude cover for all claims coming within (a), it clearly limits cover for these types of claims. As well, claims coming within (b) would appear to be excluded by Endorsement 005 in any event. In our view, the Judge’s analysis does not adequately resolve the problem with the broad interpretation she preferred. A narrower interpretation is warranted to give meaningful cover under the D&O policy.
Third, the authorities are clear that in cases of ambiguity, exclusion clauses in insurance policies should be read down, in favour of cover.[14]
[14]Westpac Banking Corporation v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA) at [69]; D A Constable Syndicate 386 v Auckland District Law Society Inc [2010] NZCA 237, [2010] 3 NZLR 23 at [69]; Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 at [39].
Adopting this approach, we do not consider that the trustee’s claims arise out of, are based upon, or are attributable to the company’s performance of professional services for a fee. The directors’ certificates and confirmations are not themselves acts of performance of services by the company, rather they are statements about the quality of its past performance. The company’s only role in relation to the certificates and confirmations was to procure them from the directors and provide them to Trustees Executors. The claim arising out of the certificates and confirmations is not that the company failed to meet its obligations to provide them but that these were negligently prepared by the directors. The company faces separate claims relating to its performance as manager of the fund but those claims are not relevant to the current indemnity dispute.
Instead of being based on the company’s performance of professional services, the claims arise out of, are based upon, or are attributable to the trustee’s discrete requirement that the directors provide certificates and confirmations independently of the company. The claims allege the directors breached that duty by making misstatements in their capacities as directors in performance of their obligations to the trustee. That is the event against which they are insured, not the performance of professional services ancillary to those performed by the company.
We add that the limited scope and purpose of the endorsement is made clear by its identification of the types of services which would fall for exclusion. The listed services are mostly advisory and all are of a nature that a director may be professionally qualified to provide in a discretely specialist area for a fee. While the examples are not exhaustive, they convey the parties’ intention that a director acting in such a professional capacity in return for payment is not covered under the D&O policy in the event of a claim, including for negligence.
For these reasons, we conclude that the endorsement in the D&O policy does not exclude cover for the claims against the directors, whereas the standard exclusion in the PI policy does.
Result
The appeal is allowed. The answer to the preliminary question is “no”.
The respondent must pay the second appellants costs for a standard appeal on a band A basis and usual disbursements.
The award of costs in favour of the respondent in the High Court is set aside. Costs in the High Court are to be dealt with in the High Court in light of the result of this judgment.
Solicitors:
Young Hunter, Christchurch for Second Appellants
McElroys, Auckland for Respondent
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