Overview


The relationship between a D&O and Professional Indemnity policy has recently been considered in the context of whether conduct constituted “professional services”

(Trustees Executors Ltd v Fund Managers Canterbury Ltd [2016] NZHC 2194).

Key Points


The giving of certain confirmations and certificates by D&Os was an adjunct to the professional services provided by company.

As a result, the PI policy properly responded to this particular claim. AIG was correct to deny cover under a professional services exclusion.

Background


Trustees Executors Ltd (TEL) issued proceedings against Fund Managers Canterbury Ltd (FMC), its directors and officers, and auditors, in the Wellington High Court. The claim against FMC and the D&Os concerned alleged negligence and breach of the Fair Trading Act arising from lending decisions in conjunction with the Canterbury Mortgage Trust Group Investment Fund (CMT) which was wound up in 2009.

FMC and the D&Os notified the claim to AIG Insurance New Zealand Ltd. AIG accepted the claim fell within FMC’s PI policy. It declined to indemnify the D&Os separately under the D&O policy relying on an endorsement to that policy which excluded claims alleging, arising out of, based upon or attributable to FMC’s, or an insured’s, performance of professional services for a fee.

At issue was whether the issuing of certain quarterly certificates and confirmations constituted “professional services” for the purpose of the endorsement. There was no doubt that FMC was contractually bound to provide those certificates and confirmations for payment of a fee.

In accordance with their contractual obligations, FMC was obliged to provide the confirmations in each mortgage application. The general manager prepared those. Two directors were required to approve them. FMC was also required to provide TEL with quarterly certificates, again signed by two directors. These certified that, in the period leading up to the giving of the certificate, and having made all due inquiries, no matters had occurred to materially and adversely affect the interests of unitholders in the CMT. Each certificate set out a number of matters which the directors were required to consider. These included that FMC had duly observed the provisions of the Trust Deed, and had adhered to the Investment Guidelines.

The D&Os disagreed with AIG’s position that the issuing of the certificates and confirmations constituted professional services so fell squarely within the endorsement. They joined AIG to the proceedings as a third party.

Ellis J was asked to determine the insurance point by way of a preliminary question. Her Honour found in favour of AIG. In summary she held:

  • The purpose of the certificates and confirmations was to provide direct and indirect assurance to TEL that the Fund was being properly managed, and to facilitate TEL’s own monitoring function for the unitholders;
  • The provision of the assurance as to quality of the service being provided was part and parcel of the service itself;
  • The fee FMC received for fund management constitutes the requisite payment in terms of the endorsement.

In short, the Judge found that no service was provided by the D&Os. Rather, the issuing of the certificates and confirmations was an adjunct to (arising out of, based on or attributable to) the provision of professional services by FMC to TEL.

The Judge considered the inter-relationship between the D&O and PI policies. She quite properly considered that the PI policy must respond, as the D&Os would have expected, and the parties would have intended, that they would have insurance when performing their function as manager to the CMT. They were acting in their role as manager, rather than as a D&O simpliciter, when issuing the certificates and confirmations.


Conclusion


The two policies dovetail together. The D&O policy is not rendered meaningless by this outcome. The D&Os would still have cover under the D&O policy for other claims. Regulatory prosecutions are a classic example, particularly when the units in the CMT were participatory securities under the Securities Act 1978, with a registered prospectus.
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While some will query the correctness of this decision, it reflects the underwriting intention of insuring professional services risks under a PI policy. D&O cover is still necessary, but for risks associated with that role, independently of providing professional services themselves.


For any further information regarding this please contact Andrea Challis.

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This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.