Proper governance requires systems to identify potential risks and lawsuits. The absence of proper governance, and the consequent late identification of such risk, may have significant implications on the availability or otherwise of insurance purchased to cover exactly those risks.
In DIF III – Global Co Investment Fund LP v Babcock and Brown International Pty Ltd [2019] NSWSC 52 the Court was required to determine the obligation of insurers under professional indemnity and directors’ and officers’ policies to indemnify against claims arising out of certain complex commercial transactions.
Ultimately, the plaintiffs’ claims were dismissed. However, had the claims been successful, the insurers would not have been liable to indemnify under either insurance policy, because inadequate notifications were made.
The transactions giving rise to the claims were complex, arising out of the purchase of certain assets in the USA for USD1.46billion. The transaction was a commercial failure.
The policy period was from 1 September 2008 to 1 September 2009. The relevant individuals and the manager were agreed to be Insured under the policy.
In fairly typical terms, the insuring clause under the PI policy provided:
“Underwriters shall pay on behalf of the Assured Loss resulting from Claims made against the Assured by third parties for Civil Liability provided such Claims arise out of the provision...of Financial Services to third parties and are first made during the Policy Period.”
The claims were made after the policy period expired. The plaintiffs sought to rely on giving notification of a fact or circumstance or event which could reasonably be anticipated to give rise to a claim the awareness of which arose during the policy period.
The insurers denied liability on the ground the claim was not made during the policy period or that Assured's Management did not become aware of circumstances during the policy period which could reasonably be anticipated to give rise to the claims that were made. S54 of the Insurance Contracts Act could not cure this.
The role of s54 has been a difficult one. It is a remedial protection for policy holders. Section 54 may forgive conduct, including late notification under a claims made policy in certain circumstances.
The relevant question was whether the Assured’s Management first became aware of acts, matters or events during the policy period which could reasonably be anticipated to give rise to the claim in which indemnity was sought during the policy period. Ultimately, His Honour concluded that it did not. There was no evidence that anybody who formed part of the Assured Manager’s Management had requisite knowledge at the relevant time.
It followed that there was no relevant notification of a circumstance to engage the PI policies because at no time during the policy period was there knowledge of the likelihood of a claim. Those conclusions alone were sufficient to refuse the claims against the PI insurers [349].
Next, the question of the liability of the D&O Insurers was considered. Again, as the claims against the plaintiffs had failed, there was no indemnity required for damages. However, the question arose as to whether or not there was an entitlement of the insurers under the D&O policy to defence costs.
The D&O insurers asserted the claims did not fall within the circumstances notified under that policy.
The notification was of a potential claim that was not the claim actually brought. The claims did not arise out of circumstances notified during the policy period. Section 54 was not available to assist and the claims for indemnity failed.
The decision makes it clear that the terms on which a circumstance that may give rise to a claim under a claims made policy, should be notified with particular care. It is also clear that due enquiry should be made, before the expiration of a policy, to identify and to notify any circumstances that may give rise to a claim for which the insurance policy may provide coverage.
When confronted with a potentially notifiable circumstance, an organisation may wish to take advice on how best notice should be given. Insurance is expensive. Insurance is bought to provide remedial benefits. Time travel is not available to correct historical errors. It is important not to give away the benefit of a policy.
