This Court of Appeal decision asks whether a PI or D&O policy should respond to a claim against directors of a fund management company who allegedly negligently signed quarterly directors’ certificates and confirmations.
Fund Managers Canterbury (FMC) entered into a trust deed with Trustees Executors to manage a contributory mortgage investment fund on their behalf.
Under the Trust Deed, FMC was obliged to provide Trustees Executors with quarterly directors’ certificates, certifying whether FMC had complied with the Trust Deed. FMC was also obliged to provide directors’ confirmations that each new mortgage met the stipulated lending criteria.
Following substantial losses to the fund, Trustees Executors pursued a number of claims against FMC. It also pursued claims against FMC’s directors personally, alleging negligence in preparing the directors’ certificates and confirmations, and misleading and deceptive conduct.
The key issue before the Court of Appeal was which of the directors’ Professional Indemnity policy (the PI policy) or Directors’ and Officers’ Liability policy (the D&O policy) responded to the claims. Importantly, the D&O policy provided significantly greater cover.
The D&O policy provided cover for loss incurred by the directors arising from any claim for any ‘wrongful act’. An endorsement to the policy excluded cover for claims 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.”
The PI policy, on the other hand, excluded cover for any claim brought against the Insured “as a director, officer or equivalent executive”.
Which policy responded?
There was no question that the directors would receive cover from one of the two policies. The High Court held that the PI policy responded. It reasoned that the provision of directors’ certificates and confirmations were ‘adjuncts’ to professional services provided by FMC to Trustees Executors, and it was paid a fee for these services.
The Court of Appeal disagreed. In its view, the directors were acting as directors when they signed the certificates and confirmations. The claims against the directors fell squarely within the scope of the exclusion clause in the PI policy that excluded claims against the insured “as a director”.
With respect to the D&O policy, the insurer argued that the endorsement excluded cover as the directors’ provision of the certificates and confirmations arose out of, were based on, or were attributable to FMC’s performance of professional services for Trustees Executors.
However, the Court of Appeal saw such a literal interpretation of the endorsement as contrary to the context and purpose of the policy. Firstly, it took into account that the PI policy contained a clear exclusion for claims brought against directors when acting in their capacity as directors. Secondly, on a wide reading of the exclusion, everything the directors did for the company could be said to arise out of the company’s services to Trustees Executors. A broad interpretation would risk depriving the directors of any meaningful cover under the D&O policy. Thirdly, the case law is clear that, in cases of ambiguity, exclusion clauses should be read down in favour of cover.
In light of this approach, the Court of Appeal said that the directors’ certificates and confirmations were not themselves acts of performance of services by the company, but rather statements about the quality of its past performance. The directors provided certificates and confirmations independently of the company, and the claims were that they did so negligently.
The Court of Appeal concluded that the endorsement in the D&O policy did not exclude cover, and that the D&O policy responded.
Comment from Angus Wakeman, Senior Associate at Fee Langstone
Angus Wakeman says that this case recognises the need to look at the inherent character of the acts or conduct giving rise to the claim, to assess whether it falls under the cover provided by the D&O or PI policies. What drove the Court of Appeal to differ from the High Court was its perception of the commercial intent underpinning the policy.
This case makes it clear that there is an important distinction between professional services provided by the company (which may be insured under a PI policy but not a D&O policy) and acts done by the director in his or her capacity as a director, which are covered by the D&O policy. A director’s certification to a third party that the company complies with certain financial criteria is not a professional service provided by the company but an act performed by the director, in his or her capacity as such.