Australian court gives effect to the term ˜retroactive date’Author : Charles Simon and Clare Branch

Public and Products Liability

On 19 December 2008, Justice McDougall delivered judgment in the Supreme Court of NSW in Towry Law v Chubb Insurance & Ors [2008] NSWSC 1352.  The decision concerned the construction of a composite policy of insurance written under a Jumbo line slip and underwritten by twenty seven insurance companies and Lloyd’s Syndicates (the Underwriters) in separate proportions for the period 31 December 1999 to 31 December 2002.

Background to dispute

The plaintiffs, Towry Law plc and UKFP (Asia) HK Limited (collectively the Towry Law Parties) became subsidiaries of AMP during the currency of the policy.

Towry Law sought indemnity pursuant to the professional indemnity section of the subject policy relevant to damages paid to investors under a Hong Kong compensation scheme as a result of alleged mis-selling by the Towry Law Parties of a number of funds to its clients.  The claims arose from matters which occurred before the Towry Law Parties became subsidiaries of AMP.  Underwriters denied indemnity to the Towry Law Parties on the basis of a retroactive date which applied under the policy to subsidiaries acquired during the policy period (the retroactive date being the date of the acquisition as set out in General Condition 12(B) of the policy).

The question of indemnity hinged on three fundamental issues:

+     whether, on the proper construction of the policy, General Condition 12(B) operates to impose a retroactive date exclusion or limitation on any cover provided under the professional indemnity section of the policy to a subsidiary acquired after 31 December 1999;

+     if the policy were to be constructed in a manner contended for by the Towry Law Parties, whether Underwriters were entitled to rectification of the policy such that it would provide that a company acquired by AMP during the period of insurance was not entitled to be indemnified in respect of claims arising out of events that occurred before the date of acquisition unless Underwriters expressly agreed otherwise (the rectification argument); and

+     whether, as an alternative to the rectification argument, Underwriters conducted themselves on the basis that the policy, regardless of its proper construction, had the effect of excluding claims arising out of events that occurred before the date of acquisition so that a conventional estoppel arose (the estoppel argument).  Underwriters asserted that they would suffer detriment if the Towry Law Parties were permitted to assert rights inconsistent with the terms of the conventional assumption on which Underwriters and AMP had conducted their affairs.

General Condition 12(B) was a term of the policy whereby, on certain conditions, œacquisitions made by [AMP] will be automatically covered¦ . Debate turned on a sentence in General Condition 12(B) which provided that œThe Retroactive Date in respect of the acquisition to be the date of the acquisition or to be agreed by Underwriters.

Judgment

There was common ground between the parties that, so far as questions of subjective intention or understanding of the Underwriters were relevant, the intention or understanding of the following market was to be ascertained by reference to the intention or understanding of the leading underwriters who made the declarations.  This obviated the need to call evidence from all 27 underwriters relevant to the rectification argument.

It was also common ground between the parties that the Court was concerned to ascertain the œobjective intention of the parties insofar as that intention appeared from the terms in which the parties agreed their contract and other matters to which the Court may have had regard.  Those matters included the purpose and object of the transaction, namely, what, in a commercial sense, the parties were seeking to achieve by it.

It is trite law that the term in question was to be given the meaning which a reasonable person, having the background knowledge of the parties at the time of the agreement, would understand it to have from the language used by the parties: Pacific Carriers Limited v BNP Paribas (2004 218 CLR 461-462).  In undertaking the construction of the term, the Court determined that it should take into account the purpose that reasonable persons in the position of the parties would have.  To do this, the Court should have regard to the genesis of the transaction, the background to it, its context and the market in which it was made: Zhu v Treasurer of the State of NSW (2004) 218 CLR 530 at 559.

In essence, the Court found in favour of the Underwriters on the questions of construction, rectification and estoppel.

œRetroactive Date

The Court analysed the inter-relationship between an œAssured and General Condition 12(B) of the policy.  The Court held that the effect of the proviso to the definition of Assured in the policy was that an after-acquired subsidiary must meet the conditions spelled out in General Condition 12(B) before it could fall within the class of œAssured so as to become entitled to the benefit of indemnity under the relevant insuring clause.  General Condition 12(B) extended to after-acquired subsidiaries meeting the criteria expressed in the clause.

In General Condition 12(B) the words œRetroactive Date were held to be related to œthe acquisition.  In such a context, the phrase œthe acquisition referred back to the introductory words of the clause œ¦acquisitions made by the Assured.  Such usage suggested that the automatic cover provided to such acquisitions was qualified by a retroactive date for each acquisition: the date of acquisition unless otherwise agreed.

The Court recognised however that the problem was not able to be solved merely by the application of linguistic analysis.  Ultimately, it was necessary to look to the intention of the parties in order to determine the proper interpretation of the policy.

The Court acknowledged that the information provided to Underwriters in respect of AMP and Underwriters’ ability to request more information, and analyse the information given, underpinned Underwriters’ decision to accept the risk, subject only to the protection offered by the œDiscovery Limitation Clauses in the policy.  The Court recognised that Underwriters would not be given equivalent information in respect of subsidiaries acquired by AMP during the period of insurance.  Thus, at the moment upon which cover attached to an acquisition, the Court acknowledged that one would not expect Underwriters to be in possession of any information at all, let alone information sufficient to allow them to assess the risk of offering cover on a retroactive basis.

The Court recognised that Underwriters would be prepared to offer automatic cover in respect of acquisitions from the date of acquisition.  The Court recognised, however, that it did not follow that Underwriters would have been prepared to take on, as well, the risk that any due diligence undertaken by AMP was sufficient to remove the risk of claims arising out of the activities of acquired companies prior to acquisition.

The Court opined that the intention of the parties, objectively ascertained, was to ensure that the automatic coverage extended to acquisitions by General Condition 12(B) did not of itself oblige Underwriters to accept an obligation to indemnify the acquired entity for claims arising from matters that occurred before the date of acquisition.  The Court opined that such a finding might explain why, in General Condition 12(B), the concept of any œRetroactive Date was linked to œthe acquisition rather than to œloss (as was the case elsewhere in the policy).

Ultimately, the Court found that an acquired entity’s inclusion in the class of an œAssured was expressly made œsubject to the retroactive date, unless Underwriters agreed otherwise.

Rectification

Given the Court’s findings on the question of construction, it was not necessary for the Court to consider Underwriters’ arguments for rectification.  Nevertheless, the Court made certain findings in the event that an appeal is pursued by the Towry Law Parties.  The Court found that were it necessary to express a concluded view on rectification, it would have concluded that General Condition 12(B) should be rectified so as to impose a retroactive date exclusion or limitation on any cover provided under the professional indemnity section of the policy to a subsidiary acquired after 31 December 1999.

Estoppel

Similarly, given the Court’s conclusions on the question of construction, it was not necessary to deal with the issue of estoppel.  Again, the Court found that if it were necessary to deal with the question of estoppel, it would have found in favour of the Underwriters.  The Court found that Underwriters would suffer prejudice if the Towry Law Parties or AMP were permitted to depart from the assumption that General Condition 12(B) operated such that automatic coverage extended to a relevant acquisition (during the currency of the policy) would not provide indemnity for claims arising out of events that occurred before the date of acquisition unless Underwriters expressly agreed to this.

Implications

Although the findings are based on facts specific to the case, the judgment represents a sound and careful analysis of a wide range of issues relating to the interpretation of policies of insurance.  It also provides an insight into the manner in which an Australian court was prepared to adopt the industry meaning of the term œretroactive date and the manner in which the Court accepted the commercial purpose of a clause inserted by Underwriters to limit their exposure in circumstances where they did not have any relevant underwriting information for their consideration in making a decision or assessing a risk of a new subsidiary.

Justice McDougall’s decision was closely reasoned and examined in some detail, with particular focus on the issues of policy construction, rectification and estoppel.

17/02/2009