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How retro is your date?

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Summary: In ARC Capital Partners Limited v. Brit Syndicates Limited and QBE Underwriting Limited, the Commercial Court had to consider some of the provisions of an excess layer professional indemnity policy issued to the Claimants to cover their professional liabilities as asset managers.

Facts

In August 2014, ARC Capital Holdings Limited (“the Fund”) issued proceedings against its associated company ARC Capital Partners Limited (“the Manager”) in respect of the loss of value of an investment of approximately US$75m made by the Manager on behalf of the Fund in relation to a property business named Orient Home Group.

Although proceedings were issued in August 2014, draft Particulars of Claim had been provided in January 2014. The judgment recites a number of paragraphs of the Particulars which make it clear that the basis of the professional negligence claim was that the Manager arranged for the full amount of the investment to be paid without ensuring that monies were paid to an escrow account pending completion of the transfer of certain shares, or that conditions precedent were satisfied, and/or without obtaining security for performance of certain obligations under what is described as the 2010 Onshore Share Purchase Agreement.

The catch was that the Fund pleaded an alternative case to the effect that if the underlying claim failed, then the Manager was also in breach by concluding a Capital Injection Agreement made in 2008 when they should not have done so, and thus exposed the Fund to claims that they were bound to perform those earlier agreements. The precise details of these failings were not particularised, and it is not obvious from the Judgment why the Fund felt it necessary to include such allegations.

The difficulty this created was that on the primary case, the allegations all post-dated 5 June 2009, but on the alternative case, certain acts or omissions were prior to that date.

Retroactive Date

The reason this mattered was that the Manager’s insurance policy from 23 October 2013 to 23 October 2014 included a clause reading:

“This Broker Insurance Document shall not indemnify the Assured against any claim and or claims arising from or in any way involving any act, error or omission committed or alleged to have been committed prior to the 5 June 2009”.

The inclusion of such provisions is common for a new insurer coming on risk, and this was the case here, in that Brit had first come on risk for the Manager with an annual policy incepting in June 2009.

The argument maintained by the insurers was that the current claim was excluded by virtue of the reference in the Amended Particulars of Claim to the 2008 Agreement.

The question for the Court was precisely what was meant by the phrase “claims arising from or in any way involving”. “Arising from” is a phrase which is commonly used in relation to professional indemnity policies, both to define the scope of the coverage, and in relation to the applicability of exclusions. In the case of Cox v. Employer’s Liability Assurance Corporation, the Court had said that these were words to be construed as ones relating to the proximate cause of a loss, a position which was generally accepted by the parties here.

The question was what was added by the phrase “in any way involving”. The Court accepted that it must have some additional meaning, and the best analysis was that it should mean “indirectly caused by”, thus giving it a meaning different from the earlier wording and going beyond the concept of proximate cause. Such analysis does make commercial sense, as it enables an insurer to exclude matters where issues giving rise to the loss occurred at a time before they came on risk.

However, the Court also decided that the “act, error or omission” must be one which could give rise to liability, although there was no express link in the wording between that phrase and the ‘Wrongful Act’ terminology used in the insuring clause. Following analysis of the pleadings (it being accepted that represented the proper case against the Manager) the Court decided that the references to 2008 were simply part of the factual background, and did not in themselves give rise to liability; the negligence claims which were being pursued against the Manager related to their acts or omissions in 2010, and those were not caught by the retro-active date provision.

The inclusion of factual matters which could fall foul of a retroactive date provision must occur from time to time, but the Court sought to narrow the scope of the limitation so as not to apply to those which are irrelevant to the liability but are simply incidental information. In other words, the cut-off date is absolute only in relation to acts which give rise to liability; it does not affect background matters.

Notification

The second main issue concerned the notification provisions, as the policy provided:

“The Insureds shall as a condition precedent, to exercising any right under this Policy, give to the Company written notice of any Claim as soon as practicable and in any event no later than…”.

The policy went onto provide that “if during the Policy Period…an Insured becomes aware of any circumstance which could give rise to a Claim and gives written notice of such circumstances to the Company as soon as practicable thereafter…then any Claim subsequently arising from circumstances shall be considered to have been made during the Policy Period”.

In other words, there was a draconian sanction for failure to notify a claim, but a discretion was given to notify a circumstance, an approach which is common to many types of policy.

Although proceedings had been commenced in August 2014 and preceded by a letter of claim in January 2014, insurers relied upon a letter which had been sent by the Fund’s solicitors to the Manager on 2 April 2013, which preceded the policy period. Notice of that letter had not been given, and if that letter constituted a claim, there was undoubtedly non-compliance with the condition precedent.

The letter included references to the matters which ultimately formed part of the claim (such as the failure to ensure monies were paid into escrow, failure to obtain security, and non-compliance with condition precedent in relation to the Orient Home Investment), but the paragraph headed “Claims by the Fund” read:-

“It is our view, based on our preliminary investigations, that the Fund has a strong claim against the Manager for recovery of the payment and/or related losses, costs and interest. Whilst the principal purpose of this letter is to endeavour to agree a process for the swift and effective recovery of these sums rather than to assess as expected on the Fund’s claim against the Manager…its rights more generally as against the Manager are fully reserved” and any steps taken “are not in any way a waiver of the Fund’s rights”.

In addition, it stated “It is our view that the Fund has a strong claim against the Manager” in the context of payment of the costs of any recovery strategy.

Under the policy, a claim was defined as meaning:-

“A written demand for monetary damages or non-pecuniary relief…against an Insured for a Wrongful Act”, as well as the issue of proceedings.

Wrongful Act was defined as:-

“Any act or omission, including but not limited to, any error, misstatement, misleading statement, neglect, breach of duty, or breach of trust committed or attempted, by an Insured…while performing or failing to perform for Professional Services”.

The Court characterised the letter as not being a demand, as it expressly reserved rights in the future, and aimed set up an agreed protocol to effect recoveries. Certainly, the letter does not comply with the requirements of a professional indemnity pre-action protocol letter but the insured might be regarded as slightly fortunate that a narrow meaning was given to the meaning of the word “demand”. The letter did in fact contain all of the essentials, albeit not in detail, which were to constitute a claim in the future. Whilst a requirement for co-operation as to the cost of recoveries is not a demand for payment, it is arguably ‘non-pecuniary relief’.

As far as can be seen from the judgment, the policy did not contain any clear identification of what could be notified as a circumstance. Many policies do contain provisions that a circumstance must meet certain criteria, such as identifying the potential claimants, the acts or omissions in question, the amount of loss and any surrounding information. Had such a clause existed here, then the criteria to notify a circumstance might well have been met, and information could have been provided to the insurers. Notwithstanding the discretion to notify circumstances, it might be thought that this was correspondence which should have been notified by any prudent insured, and no explanation is given in the judgment as to why this was not done.

Insurers might wish to reconsider some of the wordings in their notification provisions to ensure that notice is given of such correspondence. Had the definition of claim included the words “intention to make a claim” (as is common) the letter in question might well have fallen within that categorisation.

The Court also decided that even if the April 2013 letter had constituted a claim, the Manager would have been protected by a continuity of cover clause, given that the same insurers had been on risk since 2009.

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