A failed $25 million investment reinforces the importance of early and specific claim notification

13 July 2020

The NSW Court of Appeal has unanimously dismissed an appeal by DIF III - Global Co-Investment Fund L.P (DIF). The appeal addressed, amongst other things, the entitlement of DIF Capital Partners Limited (the Manager) to cover under a policy of professional indemnity insurance (the Policy).

In Issue

The primary issue considered by the Court of Appeal on the coverage question was whether the trial judge had erred by rejecting DIF’s contention that its claim against the Manager was a third party claim covered by the Policy.

The background

The proceedings arose out of DIF’s $25 million investment in a transaction by which Babcock & Brown LP acquired control of a laundry services company called Coinmach Services Corporation (Coinmach). The investment performed poorly, causing DIF to suffer a claimed total loss of $24,681,402.80 (plus interest).

In 2018, DIF brought claims against the Manager and its professional indemnity insurers (the insurers), as well as various individuals of an investment committee and their respective D&O insurers. DIF alleged wrongdoing in promoting the Coinmach transaction and in not passing on concerns raised by one of the banks that provided financing for the acquisition.

The insurers, who had carriage of the Manager’s defence of DIF’s claims, admitted that the Manager had breached the terms of a management agreement it had entered into with DIF. The insurers denied that this admitted breach had been causative of any of DIF’s claimed losses. The insurers also denied that they had any obligation to indemnify the Manager under the Policy.

The decision at trial

The Policy had been issued to the Manager for the policy period 1 September 2008 to 1 September 2009. Whilst the Policy was written on a claims made basis, Clause 7 included an extension in respect of circumstances notified during the policy period.

Clause 7 provided that a third party claim “is considered to be made” when the Assured’s management 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 trial judge held that various pieces of correspondence within the 2008/2009 policy period, relied upon by DIF to establish that a ‘claim’ should be deemed to have been made, did not point to the claim in respect of which indemnity was sought but rather referred generally to:

  • The Coinmach investment performing badly; and
  • A possible claim by one member of the Babcock & Brown Group against an entity that was not the Manager.

Further, the trial judge found that the evidence did not establish that the correspondence relied upon by DIF had been received by persons whose knowledge could then be attributed to the Manager.

The trial judge found that the Policy did not respond to indemnify the Manager. His Honour also found against DIF regarding:

  • A breach of contract claim it had maintained against the Manager; and
  • Various other claims it had maintained against the individual members of the investment committee and their respective D&O insurers.

The issues on appeal

Following a settlement, DIF did not press any of its appeal grounds against the investment committee individuals or their D&O insurers. DIF only proceeded to appeal hearing on:

  • Whether the trial judge had erred in his finding that the Policy did not respond to indemnify the Manager.
  • Whether the trial judge had erred in his finding that the Manager’s admitted breach of contract had not been causative of DIF’s extensive losses.

The decision on appeal

Meagher JA, in a judgment to which Bathurst CJ and Bell P agreed, held that the trial judge did not err in his finding that no member of the senior management of the Manager had become aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a claim by DIF against it at any future time. Meagher JA approved the statement in HLB Kidsons (a firm) v Lloyd’s Underwriters [2008] EWCA Civ 1206 that the notifiable circumstance must be such that it “may reasonably be regarded in itself as a matter which may give rise to a claim”. Put another way, the notifiable circumstances must indicate or suggest there was a “problem” which might of itself result in claims.

The three items of correspondence relied upon did not satisfy this test. The fact that Coinmach was in a distressed financial position in the 2008/2009 policy period (which was the effect of two of the communications relied upon) made it more likely that there were persons, including DIF, who would suffer losses however this was not of itself a matter that could reasonably be anticipated to give rise to a claim against the Manager. The other item of correspondence did not provide any basis for thinking a claim of some sort might be brought against the Manager. As such, there was no notifiable circumstance within the 2008/2009 policy period (or the 30 day period after its expiry).

Meagher JA also noted that, even assuming such circumstances had existed, it had not been established by DIF that its 2018 claim against the Manager had been brought as a ‘direct result’ of them, which was a condition prescribed by the Policy that had to be met before coverage would extend.

The Court dismissed all of DIF’s appeal grounds. In so doing, the Court did not consider a notice of contention filed by the insurers which sought to agitate whether a conflicts exclusion in clause 7 of the Policy applied.

Meagher JA, in obiter comments, noted that if DIF’s claims regarding a ‘claim’ having been made had been made out, the parties had accepted that s 54 of the Insurance Contracts Act 1984 (Cth) meant that the insurers could not refuse to pay the Manager’s claim to an indemnity only by reason of its failure to notify. This outcome was on all fours with the decision in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 as the Policy contained a deeming clause, rather than leaving this issue to section 40 of the Insurance Contracts Act 1984 (Cth).

Implications for you

The findings of the Court of Appeal reaffirm the importance of:

  • The precise terms of a policy of insurance always needing to be carefully considered.
  • Evidence satisfying the specific requirements of a policy regarding the deeming of claims needing to be adduced by the insureds or plaintiffs claiming recourse to them.

The decision also contains a useful analysis of the applicable legal principles on the requirements for a notifiable circumstance. This is of broad application, including in relation to issues of disclosure of circumstances at the time of policy inception and the effectiveness of notifications.

DIF III – Global Co-Investment Fund L.P v DIF Capital Partners Limited [2020] NSWCA 124

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