Trustees Executors Limited v Fund Managers Canterbury Limited
[2016] NZHC 2194
•16 September 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-4040 [2016] NZHC 2194
BETWEEN TRUSTEES EXECUTORS LIMITED
Plaintiff
AND
FUND MANAGERS CANTERBURY LIMITED
First Defendant
DELOITTE Second Defendant
DELOITTE LIMITED Third Defendant
GRAEME MAIN Fourth Defendant
ALEXANDER DONALD MCBEATH, PAUL ERNEST MCEWAN, ALAN WILLIAM PRESCOTT, GEOFFREY READ THOMAS, ANDREW HENDRA YOUNG and OLIVER RODERICK MATSON
Fifth Defendants
AND
YOGESH MODY
First Third Party (Struck Out)AIG INSURANCE NEW ZEALAND LIMITED
Second Third Party
Hearing: 26 April 2016 Counsel:
C M Stevens and I Tokmadzic for Plaintiff
I G Hunt and D R Weatherley for First and Fifth Defendants
J E Standage for Second and Third Defendants
H D P van Schreven for Fourth Defendant
A C Challis for Second Third PartyJudgment:
16 September 2016
TRUSTEES EXECUTORS LIMITED v FUND MANAGERS CANTERBURY LIMITED [2016] NZHC 2194 [16 September 2016]
JUDGMENT OF ELLIS J
I direct that the delivery time of this judgment is
2 pm on the 16th day of September 2016
Table of Contents
Background [5] Canterbury Mortgage Trust Group Investment Fund [5] The Trust Deed [7] The Mortgage Management Agreement [19] The Guidelines [23] Manuals [28] The Directors [29] Mr Main [31] Suspension of the Fund [33]
The insurance policies and the claim [34] The D&O Policy [37] The PI Policy [44] The claims [49] The preliminary question [56] The law [60] General principles [60] Relevant authorities [63] Analysis: this case [64] Interpreting Endorsement 005 [64] Conclusion [84]
[1] The Canterbury Mortgage Trust Group Investment Fund (the Fund) was suspended on 4 June 2008. It was wound up in early 2009. This proceeding forms part of the legal fall-out. In it, the trustee of the Fund sues the company charged with managing the Fund, together with its directors and general manager for alleged breaches of duty and other obligations. Consequential issues of indemnity and insurance have arisen. In particular, there is a dispute about whether insurance cover for the claims against the directors and general manager is excluded by an endorsement on the company’s “Directors and Officers” insurance policy.
[2] On 22 February 2016 Williams J ordered (by consent) that there be a hearing of a preliminary question under r 10.15 in relation to that issue.
[3] Although the key legal documents were before me by consent, no evidence was filed in relation to the preliminary question itself. Rather, the relevant background was the subject of an agreed (for the purposes of the preliminary question only) statement of facts. That agreed statement largely comprised a summary of the legal documents. No formal case was stated in terms of r 10.20.1
[4] Although my rehearsal of the background below is based on that agreed statement I have interpolated other aspects of the legal documents which I also regard as relevant.
Background
Canterbury Mortgage Trust Group Investment Fund
[5] The Canterbury Mortgage Trust (the CMT) was established on 12 July 1999. Trustees Executors Ltd (TEL) was the trustee of the CMT. The CMT was a unit trust which was the successor to the nominee companies of various firms of solicitors in Christchurch and Dunedin. Fund Managers Canterbury Ltd (FMC) was incorporated on 16 April 1999 to manage the CMT. The directors of FMC are the fifth defendants
in this proceeding (the directors). The fourth defendant, Graeme Main, was the
1 My assumption is that the parties agreed not to file evidence in an attempt to avoid some of the common fishhooks in the r 10.15 procedure, such as subsequent questions of res judicata.
general manager of FMC. He was engaged by FMC pursuant to an individual employment agreement.
[6] The CMT was replaced by the Fund in 2001. The assets of CMT were transferred to the Fund.
The Trust Deed
[7] On 26 June 2001, FMC (as manager) and TEL (as trustee) executed a Trust Deed (the Deed) which set out the rights and obligations of the trustee, the manager, and the unitholders. The Fund was a group investment fund under Pt 2 of the Trustee Companies Act 1967.
[8] Instead of investing in a single nominee mortgage, unitholders could apply for units in the Fund so their risk was spread more evenly over the entire Fund. TEL acted as the trustee for the unitholders on the terms set out in the Deed, with terms also governing the management of the fund by FMC. The units in the Fund were participatory securities under the Securities Act 1978. FMC was the issuer and promoter of the Fund. In compliance with its obligations under the Securities Act
1978 it was required to prepare and register prospectuses and investment statements. The most recent prospectus is dated 14 August 2007.
[9] The Fund was to be invested in authorised mortgage investments in accordance with the investment policy. Authorised investments were defined to include loans made on the security of a mortgage, or mortgage backed security, which are one of two types of investment which FMC and TEL agreed was to be a primary investment for the Fund. The investment policy involved the provision of a low risk investment to investors, aimed at a secure and relatively stable income stream that was normally better than bank deposits, competitive with comparable investment products. This was to be achieved by a broad and secure range of mortgage investments.
[10] Neither FMC nor TEL had any duty or obligation to exercise the care, diligence or skill of a prudent person of business in managing investments, other than to the extent required by the investment policy.
[11] Subject to cls 78 to 82 of the Deed, FMC had the absolute and uncontrolled discretion as to management of the Fund.
[12] Under cl 124, FMC covenanted with TEL and for the benefit of unitholders that it would (inter alia):
(a) use its best endeavours to carry on and conduct its business in a proper and efficient manner;
(b)use its best endeavours to ensure that the investments of the Fund were properly managed;
(c) make available to TEL for inspection all books and records relating to the Fund and, on request, provide information relating to those records;
(d)allow TEL a reasonable time to comment on each prospectus and investment statement prior to the issue of each;
(e) forward to TEL all notices, reports, circulars and other documents relating to the Deed; and
(f) forward to TEL all notices, reports, circulars and other documents sent by it to unitholders.
[13] As well as the cl 124 obligations to provide information and access to records and documents, cls 214 and 215 contained the specific reporting requirements that have given rise to the question presently before the Court.
[14] Pursuant to cl 214, FMC was required to give TEL quarterly certificates (signed by two directors on behalf of all of them) setting out in detail “any matters which since the date of the last certificate … have in their opinion occurred to affect materially and adversely the interests of the unitholders”. The clause required the directors to certify “to the best of their knowledge and belief” and having made “due inquiries” 20 listed matters, including whether or not:
(a) FMC had observed and performed all covenants, conditions, agreements and provisions under the Deed;
(b)any circumstances affecting the fund had occurred which materially and adversely affect the interests of the unitholders generally in the Fund;
(c) the directors considered that the manager had adhered to the Fund’s
mortgage investment guidelines; and
(d)any circumstances had arisen that made the report furnished under cl 215 false or misleading.
[15] And cl 215 provided that within 15 days of month end, an authorised officer of FMC was required to provide a monthly report for the Fund as to the unit value of the Fund, the aggregate number of units on issue, and such other information as TEL may reasonably request from time-to-time.
[16] Pursuant to cl 155 neither FMC, TEL, nor any director or officer of either entity, are exempted against liability for breach of trust where they have failed to show the degree of care and diligence required of that person in that capacity, having regard to the provisions of the Deed and the powers/discretions conferred by it.
[17] As far as TEL is concerned, cl 132 conferred on TEL full, absolute and exclusive power and control and authority over the investments of the fund. Clause 135 provided that TEL was to supervise compliance with the Deed and to ascertain whether any breach of the Deed had occurred. Its obligation to monitor was reinforced elsewhere in the Deed. Clause 136.3 also specifically empowered TEL to engage or employ any persons as independent contractors, including administration managers, registrars, underwriters, accountants, lawyers, appraisers,
brokers or otherwise and to pay those people for their services.2
2 By virtue of cl 119, FMC has the same power. No doubt the Fund’s auditors (Deloitte) and solicitors (Anderson Lloyd) were appointed under these provisions.
[18] While cls 81 and 82 make it clear that TEL’s primary duty was to act on any direction or request by FMC, cl 82 provided that TEL had the right not to act on any direction of FMC if the proposed investment, acquisition or disposition was not in accordance with the investment guidelines or was contrary to the Deed.
The Mortgage Management Agreement
[19] On 13 August 2001 TEL and FMC entered into a Mortgage Management Agreement for the Fund (the MMA) to record and define FMC’s obligations in relation to the management of mortgages. The MMA required FMC to comply with the Mortgage Investment Guidelines of the Fund (the Guidelines), which are recorded in the first Schedule to the MMA.
[20] Under the MMA, FMC’s mortgage management responsibilities included
(but were not limited to):
(a) the establishment and maintenance of investment files;
(b)carrying out administrative functions in connection with mortgage investments;
(c) collection of principal, interest and moneys; and
(d) establishment and operation of necessary bank accounts.
[21] FMC was to confer with TEL at regular intervals regarding the management of mortgage investments and all security documentation and “other matters of a legal nature” were to be prepared or perused by a solicitor instructed by FMC.
[22] FMC also warranted that it would:
(a) at all times perform its obligations under the MMA in good faith and with the care, diligence and skill of a prudent lender and manager of mortgage investments; and
(b)manage the mortgage investments and perform its obligations at all times in accordance with the Guidelines.
The Guidelines
[23] The Guidelines set out the parameters within which FMC was permitted to invest, and included:
(a) details of the security options;
(b) the types of title permissible as securities; and
(c) the relevant factors to be regarded when considering mortgage applications.
[24] All these were very prescriptive. Thus (for example):
(a) owner occupied dwellings and residential investment properties could only secure an advance up to 75 per cent of the value of the fee simple estate, or 50 per cent of the value of a leasehold estate;
(b)commercial properties could only secure advances up to 66.6 per cent of the value of the fee simple estate, or 50 per cent of the value of a leasehold estate;
(c) farms could only be used to secure advances of up to 50 per cent of the value of the fee simple, and could not be used as a security if they were solely a leasehold estate; and
(d) specific exposure limits were set.
[25] The Guidelines also specified that FMC was to obtain: (a) valuation advice; and
(b) legal advice in respect of the loan and security documentation.
[26] Clause 13 of the Guidelines is also central to the present matter. It provided:
The General Manager [Mr Main] shall confirm that each mortgage meets the trust’s lending criteria, and must be approved by at least two directors of Fund Managers Canterbury Limited. The recommendation and approvals are to be in writing on a submission prepared by the General Manager for the purpose[.]
[27] Several of the cl 13 confirmations were before the Court for the purpose of the preliminary question although not in a formal, evidentiary, sense. It seems that the submissions prepared by Mr Main took the form of a mortgage application. On the applications Mr Main certified that he had analysed the information provided by the applicants and was satisfied about certain information as to their financial worth. Each application also stated that if the loan was approved, then the loan to value ratio would be as stated and would meet the required criteria. Two directors are recorded as approving each application.
Manuals
[28] FMC also followed its own internal policy and procedures as set out in:
(a) a Policy & Procedure Manual – Loans: this was a document prepared by Fund Managers Group to formalise a standard set of lending policies and guidelines by all Trusts within the Group (Loan Manual); and
(b) an Office Procedures and Policy Manual (Office Manual).
The Directors
[29] As I have said, FMC issued its last prospectus in August 2007. In it, FMC’s
directors were identified and their qualifications summarised in this way:
(a) Mr Young is recorded as being a consultant in the legal firm Wynn
Williams & Co who has “extensive experience of mortgage lending”;
(b) Mr Prescott is recorded as being a partner in the law firm Harmans
who has “extensive experience in mortgage lending”;
(c) Mr McBeath is recorded as being a partner in the law firm MDS Law whose practice is a general one but with an emphasis on (inter alia) mortgages and lending;
(d)Mr Thomas is recorded as being a lawyer with Anderson Lloyd who is involved predominantly in commercial, trust and asset protection work;
(e) Mr McEwan is recorded as being a director of his own financial planning firm who specialises in building, savings and investment portfolios; and
(f) Mr Matson is recorded as being a partner in Wynn Williams & Co with a commercial and property law practice.
[30] The prospectus also notes that Anderson Lloyd are the Fund’s solicitors, and
records that:
Anderson Lloyd, Wynn Williams, Harmans and MDS Law are the law firms associated with the Manager. They are paid for their services at commercial rates. There are no express limits on the fees paid. Paul McEwan is a director of both the Manager and Paul McEwan and Associates Limited. Paul McEwan and Associates Limited is a financial planning practice which introduces investments to the fund from time to time and is paid commission by the Manager on such investments ...
Mr Main
[31] The prospectus identifies Mr Main as the General Manager of FMC, noting his “extensive experience in mortgage banking, including 13 years managing a mortgage investment company.”
[32] A copy of Mr Main’s employment agreement with FMC was also before me. It is a lengthy document but, in general terms the job description suggests that his role was generally to manage and administer FMC’s business, to maintain the register, and to initiate the production of a prospectus. The key personal attributes required included good communication skills, the ability to manage and work closely with staff, and “preferably” a background in the banking or trustee industry.
Suspension of the Fund
[33] On 3 June 2008, the auditor to the Fund, Deloitte, notified TEL of concerns regarding the Fund. As I have said, the Fund was suspended on 4 June 2008 and was wound up in February 2009.
The insurance policies and the claim
[34] The directors and Mr Main are insureds under a Chartis CorporateGuard Directors and Officers Liability Insurance policy which is underwritten by AIG (the D&O Policy). They (and FMC itself) are also insureds under a Chartis Broad Form Professional Liability for Financial Institutions policy which is also underwritten by AIG (the PI policy).
[35] Both the policies before me were for the 16 October 2011 to 16 October 2012 year. Both were executed by the same authorised signatory for the insurer on 21
February 2012. There was no evidence before me about the history of the policies or the premium paid for each.
[36] The relevant aspects of the two policies are set out below.
The D&O Policy
[37] The D&O policy insures:
… any natural person who is a past, present or future:
(a) director, secretary, or officer of the Company; …
[38] Liability under the policy is limited to $2,000,000 in the aggregate. There is no retention and no retroactive date.
[39] Cover for the liability of such persons is provided on the following terms:
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.
[40] “Wrongful act” is defined as meaning:
(1) Any actual or alleged breach of duty (including an Employment Practice Breach), breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or any 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.
[41] The policy contains both a general, and an endorsed, professional services exclusion. The general exclusion reads:
This policy does not provide cover for Loss or otherwise in connection with any Claim arising out of, based upon or attributable to:
…
The provision of professional services of any kind, other than the services provided in an Insured Person capacity to the Company [ie FMC.]
[42] And Endorsement 005 relevantly excludes payment for loss in connection with any claim against the insured:
Alleging, arising out of, or 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 …
[43] It is this Endorsement which is directly relevant to the preliminary question.
The PI Policy
[44] The liability under the PI policy is limited to $1,000,000 in the aggregate. There is a retention of $50,000 for “each and every claim” and a retroactive date of
15 December 2006.
[45] Provided the relevant wrongful act takes place on or after the retroactive date and is committed solely in the performance of, or failure to perform, “professional services” the PI policy provides cover (inter alia) for:
(a) loss resulting from any claim based upon any breach of duty of any insured (called “professional liability”); and
(b) all damages resulting from any claim for any “misleading or deceptive
conduct”.
[46] The term “Professional Services” is relevantly defined as meaning
… when rendered by or on behalf of an Insured:
the financial services of an Insured Company declared in the proposal form submitted to the Insurer at inception, pursuant to an agreement with a customer or client as long as such service is rendered for or on behalf of a customer or client of an Insured Company (1) for compensation or (2) in conjunction with services rendered for compensation; …
[47] The proposal form referred to in the definition is in broad and (for present purposes) unhelpful terms. Ms Challis submitted (without demur from the parties) that the following points can be drawn from it:
(a) one hundred per cent of FMC’s revenue was derived from individual asset management or fund management;
(b) FMC did not provide any other services;
(c) FMC had not provided any new services to its clients during the previous three years, and did not intend to offer any new services in the upcoming year;
(d)FMC managed only one account (presumably the Fund presently at issue); and
(e) all services were provided to “clients” pursuant to a standard form of contract, agreement or letter of appointment (which, she said, must mean the Deed and the MMA).
[48] The PI policy expressly excludes cover for any Claim “brought against an
Insured as a director, officer or equivalent executive”.
The claims
[49] In these proceedings, TEL alleges that FMC, the FMC directors and Mr Main breached, or failed to comply with, their obligations under the Deed, MMA, Investment Guidelines, Loan Manual and Office Manual. The accounting firm BDO undertook a review of the loan files, alleging specific breaches of these obligations. That report covered some 39 loans.
[50] The specific claims against the directors relating to the quarterly certificates allege that the directors assumed personal responsibility for giving the cl 214 certificates, that they knew TEL was relying on them and that they owed a duty of care to TEL. The alleged breaches involve failing to make due inquiries as to the matters certified. Similar allegations of negligence are made in relation to both Mr Main’s and the directors’ role in giving the cl 13 confirmations.
[51] There is also a claim of misleading or deceptive conduct under the Fair Trading Act 1986 against the directors in relation to both the certificates and the confirmations.
[52] Prior to the commencement of the proceedings, TEL had put FMC, the directors, and Mr Main on notice of a potential claim. They in turn:
(a) notified AIG of circumstances which might give rise to a claim in about March 2013; and
(b) forwarded AIG a copy of the initial statement of claim in about April
2014 when it was issued.
[53] By letter dated 26 March 2013 (also prior to commencement) AIG advised FMC of its preliminary position in respect of indemnity. In summary AIG’s position was:
(a) the PI policy prima facie responded, but there were issues regarding:
(i)allegations which concerned conduct which occurred prior to the retroactive date of 15 December 2006;
(ii)the relatively low limit of liability compared to the quantum of the loss alleged which gave rise not only to an uninsured exposure but issues of allocation of defence costs as between insured and uninsured conduct; and
(iii) the potential application of the diminution in value exclusion. (b) as to the D&O policy:
(i) the insuring clause responded to TEL’s claims; but
(ii) cover was excluded by the professional services exclusions. [54] On receipt and consideration of the specific allegations in the statement of
claim, AIG reviewed its preliminary advice and confirmed its position on indemnity by letter on 6 June 2014, asserting that the impugned actions of the directors and Mr Main constituted the performance of professional services.
[55] As a result of AIG’s position on indemnity, both the directors and Mr Main joined AIG to the proceedings as a third party. They say that AIG had breached the terms of the D&O policy by refusing to indemnify them for the claim. They seek a declaration that the policy responds, and therefore indemnity, in terms of the D&O policy. AIG has filed statements of defence pleading affirmative defences that the
policy does not provide cover as a result of the standard professional services exclusion, and that contained in Endorsement 005.
The preliminary question
[56] It is in the above context that the parties have agreed the Court should determine a preliminary question as to the indemnity position. That question was framed by the parties in the following way:
Does the giving of the certificates and confirmations (as defined in McElroys’ 26 June 2015 letter to Young Hunter and Clark Boyce) constitute “the performance of professional services for others for a fee, or any alleged act, error or omission thereto.”
[57] McElroys’ 26 June 2015 letter stated:
AIG’s declinature on the basis of the Professional Services exclusion and Endorsement 005 is itself based on the underlying conduct of the directors and Mr Main which gave rise to the relevant claims against them – namely the issuing of the quarterly certificates and directors’ confirmations and also the Main Confirmations (the Certificates and Confirmations). Specifically the issue is whether the provision of the Certificates and Confirmations constituted “professional services”. …
[58] Ms Challis advised at the hearing before me that only Endorsement 005 (rather than the professional services general exclusion) was now relied on by AIG as excluding cover for the certificates and confirmations claims.
[59] Before turning to consider the preliminary question, however, it is useful to set out the relevant aspects of the law as it relates to the interpretation of insurance contracts and, in particular, the meaning of “professional services” in an insurance context.
The law
General principles
[60] The preliminary question requires the Court to interpret Endorsement 005 in the D&O policy. Because Endorsement 005 is exclusionary, the onus is on AIG to satisfy the Court that it applies to exclude cover.
[61] Contracts of insurance are interpreted objectively. The test is, therefore, what a reasonable and properly informed third party would consider the parties intended the words of the contract to mean. The Court will consider the language used in the exclusion itself, the policy as a whole, and the surrounding circumstances. Exclusion clauses are interpreted narrowly, albeit not at the risk of strained meaning
or absurdity.3
[62] In the present case, therefore, the meaning of that part of Endorsement 005 which is quoted in the preliminary question cannot be considered apart from the surrounding words or the policy as a whole. Because the PI policy was issued by the same insurer on the same date as the D&O policy that policy may also be relevant by way of wider context.4
Relevant authorities
[63] I was referred to a number of overseas cases in which courts have considered and interpreted a range of different “professional services” clauses.5 Some were insuring, and some exclusion, clauses. Some of the exclusion clauses were in D&O policies and some were in general liability policies. It is clear that different interpretive approaches may apply depending on the positive or negative nature of the clause and the nature of the policy.6 Moreover, a number of the authorities were from the United States where, it seems, a slightly different approach is taken to interpreting insurance contracts. So, in general, other cases are of limited assistance because neither the specific wording in the relevant policies nor the wider context is
the same as the present.
3 Lumley General Insurance (NZ) Limited v Body Corporate No. 205963 [2010] NZCA 316, (2010) 16 ANZ Insurance Cases 61-853 at [27].
4 In Chubb Insurance Company of Australia Ltd v Robinson [2016] FCAFC 17 the Federal Court of Australia held that the existence of a PI policy could not be relevant to interpreting the exclusion clause in a D&O policy issued by a different insurer. But the Court said that had the
insured taken out PI and D&O cover with the same insurer, the terms of the PI cover “may have
been of some assistance in the construction of the professional services exclusion clause in the
D&O policy.” (at [122])
5 Including 470 St Kilda Road Pty Ltd v Robinson [2013] FCA 1420, (2014) 18 ANZ Insurance
Cases 62-008, and Chubb, above n 4, and the two cases referred to in the next footnote.
6 There is ample authority that the term “professional” in an insuring clause of a PI policy does not necessarily bear an identical meaning in an exclusion clause of a public liability or products liability policy: Fitzpatrick v Job [2007] WASCA 63, (2007) 14 ANZ Insurance Cases 61-731. Similarly, professional E&O exclusions in general liability policies are often interpreted more broadly than E&O exclusions in D&O policies: Great American Insurance Co v Geostar Corporation 81 Fed R Evid Serv 771 (USDC ND MI 2010) at [12].
Analysis: this case
Interpreting Endorsement 005
[64] I have set out the relevant parts of the D&O policy at [37] to [43] above. Before turning to the wording of Endorsement 005 itself, the following general points can be noted.
[65] First, the D&O policy insures only natural persons (not the company itself). As well as Endorsement 005, it contains a standard professional services exclusion which excludes cover for loss in connection with any claim arising out of, based upon or attributable to the provision of professional services of any kind, other than the services provided in an Insured Person capacity to FMC. Thus it contemplates that directors and officers can, acting in those capacities, provide services that might properly be termed “professional” to the company itself. Such services are not excluded from cover.
[66] So what might be excluded from cover under the general exclusion clause would (inter alia) be a claim arising from:
(a) the provision of legal advice to FMC by one of the legally qualified directors; or
(b) the provision of some kind of investment advice to a unitholder by
one of FMC’s directors or officers; or
(c) the provision of some kind of lending advice to a mortgagor or
potential mortgagor by one of FMC’s directors or officers; or
(d)the provision of legal advice to TEL by one of the directors in a professional capacity.7
[67] It would logically be expected that Endorsement 005 was intended further to reduce coverage under the D&O policy by excluding professional services of a kind
7 As noted above, Mr Thomas is a lawyer with Anderson Lloyd, the firm identified as being the solicitors to the Fund.
not falling within the general exclusion. But given that the general clause excludes cover for “the provision of professional services of any kind, other than the services provided in an Insured Person capacity to FMC” it might ordinarily be supposed that the scope for further reduction was limited.8
[68] In any event, the wording of the Endorsement suggests that what is relevantly and further excluded is loss in connection with any claim against a director or officer:
(a) alleging, arising out of, or based upon or attributable to that director’s
or officer’s or the Company’s:
(i) performance of professional services; (ii) for others;
(iii) for a fee, or
(b) for any alleged act, error or omission relating to such services; and
(c) including, but not limited to, services of the following kinds: (i) broking;
(ii) dealing;
(iii) financial advice;
(iv) investment advice; and
(v) real estate syndication.
8 It is also conceivable that an Endorsement merely makes explicit or highlights a specific type of conduct that was already thought to be covered by the general exclusion, out of an abundance of caution.
[69] By way of summary, in order to be excluded by Endorsement 005, the relevant claim against the directors and/or Mr Main must either be:
(a) alleging, arising out of, or based upon or attributable to their own performance of professional services for others and for a fee; or
(b)alleging, arising out of, or based upon or attributable to the Company’s performance of professional services for others and for a fee.
[70] I consider that (a) can have no application here.9 Putting to one side the issue of whether provision of the certificates and confirmations could, itself, constitute the performance of professional services, it cannot (in my view) be said that such a service was provided by the directors or Mr Main (as the case may be) to another (TEL) for a fee. Rather, the wording of cl 214 of the Deed and cl 13 of the Guidelines suggests the certificates and confirmations were required to be provided by them to FMC. There is no contractual or client relationship between the directors or Mr Main and TEL. They are not parties to the Deed. And there is no dispute that they received no discrete fee or any direct payment (from either TEL or FMC) for completing these tasks.
[71] Whether the provision of the certificates and confirmations falls within (b) 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 FMC itself to a third party (TEL). Thus it seems that Endorsement 005’s effective incorporation of acts associated with the performance of FMC’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:
9 It is also unclear to me what (a) would add to the general professional services exclusion.
(a) to which of FMC’s 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)?
[73] For AIG, Ms Challis submitted that there can be no question that FMC performed fund management services for TEL for a fee (1.5 per cent per annum of the gross value of the fund).10 She said that there were broad analogies to be drawn between fund management and some of the financial services specifically listed in the Endorsement (broking, dealing, financial advice, investment advice). Fund management therefore qualifies as a professional service.
[74] Although Ms Challis also submitted that the act of providing the certificates and confirmations itself constituted the performance of professional services I am not sure that she needed to go that far, for the reasons already given. To reiterate, 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 FMC for a third party for a fee, namely fund management
services provided to TEL.11
[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 TEL that the Fund was being properly managed and, presumably, to facilitate TEL’s 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 FMC from TEL for fund management would constitute the requisite
payment in terms of the Endorsement.
10 Under the Deed FMC may be paid a fee for the administration of the Fund (cl 189), and is
entitled to be paid a manager’s fee “for its own account” by TEL (cls 192 and 193).
11 If I am wrong in my conclusion that it is unnecessary to consider what was actually involved in preparing and providing the certificates and confirmations then I would have thought that any legal argument as to the content of the obligations would need to be informed by proper factual evidence about what the directors and Mr Main actually did in pursuance of them.
[76] But there are two matters which give me pause.
[77] First, as counsel for the principal parties submitted, everything that FMC did can be described as “fund management”. It is a single purpose, bespoke, entity whose sole function is to manage the Fund. It is called “the manager” throughout the documentation. If the matter is viewed in that way, then everything done by the directors and Mr Main in pursuit of the company’s business would arguably be excluded by the Endorsement, because it would be an adjunct to the performance by
FMC of its fund management role.12 And the cases make it clear that an exclusion
clause must not be interpreted in a way which effectively “swallows” the whole
policy.13
[78] On balance, however, I do not accept that argument. More particularly, I consider that interpreting the Endorsement in the way contended for by Ms Challis would leave the directors and Mr Main with meaningful cover under the D&O policy. In particular, it seems to me that the policy might well cover:
(a) claims of a regulatory nature, for example claims for breaches of the Companies Act, the Securities Act or possibly under the Inland Revenue statutes.14
(b)claims by potential investors, unitholders, prospective mortgagors and actual mortgagors who also receive “services” from FMC and, in some instances pay a fee for those services.15
[79] The second matter concerns the interrelationship between the PI policy and the D&O policy. I have referred already to authority which confirms that, in
12 As noted above, Ms Challis submitted that the terms of the PI policy confirm that 100 per cent of FMC’s total revenues were derived from individual asset management or fund management and that FMC did not provide any other services.
13 Great American Insurance Co, above n 6, at [10].
14 Although the definition of “wrongful act” under the policy also suggests coverage for any
“Employment Practice Breach” (which is extensively defined in the Policy) the extent of cover in that regard may be somewhat illusory as the PI insurance proposal (to which I have referred at [47] above) suggests that Mr Main was FMC’s only employee.
15 Under the Deed, FMC could charge prospective investors an application fee (cl 19), exiting investors a withdrawal or redemption fee (cl 50) and could also charge fees for services it undertook as agent for a unitholder (cls 19 and 196). There would, of course, be an issue about whether those services which were provided for a fee are themselves “professional”.
circumstances such as the present, it may be legitimate to refer to one when interpreting the other. That approach seems consistent with the orthodox principle that contractual interpretation is concerned with ascertaining the meaning which the relevant document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they found themselves at the time the contract was entered. Here, there can be no doubt that the existence of the PI policy and its terms was known to both the insurer and the insured under the D&O policy.
[80] I begin by noting that the sum insured under the PI policy is half the sum insured under the D&O policy and cover under the former is subject to considerable further restrictions. There is nothing before me that indicates why those restrictions (the retention and retroactive date) were included. Those matters might objectively suggest that the D&O exclusions should not be interpreted expansively. It may be that the respective premia paid would also indicate that the D&O policy was intended to be the principal, and more important, policy. There might even have been room for expert evidence on the issue. But none of those matters were raised by counsel and I take them no further.
[81] The rather more troubling point is this. The upshot of my reasoning above is that, in providing the certificates and confirmations, the directors and Mr Main were not themselves providing professional services, and were acting in their capacities as directors and officers of FMC. 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 FMC of professional services to TEL. But if the directors and Mr Main were, nonetheless, in fact acting as directors and officers of FMC, 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”.
[82] That outcome could not be countenanced. If the claims against the directors and Mr Main are not covered by the D&O policy, they must be covered by the PI policy. In my view there can be no doubt that, viewed objectively, the parties
intended that, one way or another, the directors and officers would have insurance when performing their functions under the Deed and related documents.
[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 and general manager 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.
Conclusion
[84] In terms of the preliminary question, then, the answer is yes, the giving of the certificates and confirmations does constitute “the performance of professional services for others for a fee”. For the reasons I have given I consider that cover for the claims against the directors and Mr Main is therefore excluded by Endorsement
005 of the D&O policy.
[85] If further consequential orders are required memoranda may be filed. A further conference with the assigned Judge should then be scheduled in order that the proceedings can be progressed towards trial.
[86] I can see no reason why 2B costs should not follow the event in the ordinary way and I so order.
Solicitors: DLA Phillips Fox, Wellington for plaintiff
“Rebecca Ellis J”
Young Hunter, Christchurch for first and fifth defendants Bell Gully, Auckland for second and third defendants Clark Boyce, Christchurch for fourth defendant McElroys, Auckland for second third party
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