Investing in Laundries – what happens when the spin cycle goes down the drain? Why specific notice of a claim is important.12 June 2019 | Directors' & Officers' Liability
The Supreme Court of NSW has determined the entitlement to cover of various persons associated with the Babcock & Brown group pursuant to professional indemnity and D&O policies of insurance for claims arising out of the failed investment in Coinmach Services Corporation.
The primary issues regarding whether the policies of insurance responded were:
- Whether legal proceedings brought against the Babcock & Brown entities had a sufficient connection with circumstances notified to the professional indemnity insurers in 2008 and 2009.
- The operation of section 54 of the Insurance Contracts Act 1984 (Cth) (ICA) in curing the failure to give notice of circumstances under an extension in a claims made policy.
The proceedings arose out of the acquisition of a US-based laundry services company (Coinmach) by Babcock & Brown. The investment performed poorly, causing significant financial loss to be suffered by a partnership established for the purposes of the investment. The partners brought claims against various other companies within the group, including DIF Capital Partners Limited (Manager) and individuals who sat on an investment committee. The plaintiffs alleged wrongdoing in promoting the Coinmach transaction and not passing on concerns raised by one of the banks that provided financing for the acquisition.
Ultimately, each of the plaintiffs’ claims failed. This case note is concerned with how the court determined certain insurance issues in the proceedings; namely whether the professional indemnity and D&O policies responded to the plaintiffs’ claims.
The Decision at Trial
Professional indemnity policies of insurance were issued covering various members of the Babcock & Brown group for the policy period 1 September 2008 to 1 September 2009. The Manager and the individuals on the investment committee met the definition of an 'Assured' in these policies. The policies were written on a claims made basis but included an extension in respect of circumstances notified during the policy period. Specifically, there was an expansive definition of when a 'Claim' was made to include when the Assured’s management first became aware of the intention of any person to make a Claim or became aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a Claim at any future time. Notice of these matters was required to be given at the earliest practical moment but in any event within 30 days of the expiry of the policy.
The plaintiffs unsuccessfully argued that various items of correspondence during the policy period that raised concerns about the investment in Coinmach meant that the Assured became aware of an intention for a claim during the policy period and that section 54 of the ICA operated to cure the late notification. Justice Ball held that the correspondence did not point to the claim in respect of which indemnity was sought but rather referred generally to the Coinmach investment performing badly and raised a possible claim by one member of the Babcock & Brown Group against other entities but not the Manager or the members of the investment committee. Additionally, the evidence did not establish that the correspondence was received by relevant persons whose knowledge could be attributed to the Assured.
No recourse could be had to section 54 of the ICA to cure a late notification of circumstances. This was because the Assured’s knowledge during the policy period of facts, circumstances or events which could reasonably be anticipated to give rise to the Claim in respect of which indemnity was sought was found to be an inherent restriction in the claim, upon which section 54 could not operate.
D&O policies were also obtained for the policy period 1 September 2008 to 1 September 2009. These policies contained an extension of cover for Claims made after the expiry of the policy period which arose out of a circumstance reasonably expected to give rise to a Claim that had been notified during the policy period. During the policy period, the primary insurer had been notified that investors in Babcock & Brown Global Partners (BBGP) were reserving their legal rights against various entities and individuals in relation to losses arising out of the investment fund, including the Coinmach transaction. Justice Ball found that there was an insufficient connection between the claims made by the plaintiffs and the potential claim by BBGP to trigger the operation of the deeming provision in the policies. His Honour considered that it could not reasonably be expected that the plaintiffs would bring a claim based on the way in which the investment was managed because there were circumstances that suggested some other entity might bring a claim because of the way its investment in Coinmach was managed. The plaintiffs did not rely upon section 54 of the ICA to cure any late notification of circumstances to the D&O insurers.
Implications for you
The decision illustrates that notification of broad circumstances under claims made policies will not necessarily be sufficient to obtain indemnity in respect of claims subsequently made that might arise or have some loose connection to those circumstances. The precise terms of the policies need to be carefully considered and evidence satisfying the specific requirements in any policy for the deeming of claims where circumstances have been notified will need to be presented by insureds or plaintiffs claiming direct access to the insurance.