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FORMER DIRECTORS OF TRIO CAPITAL LTD v ACE INSURANCE LTD
MEMORANDUM
1. My instructing solicitors act for GSA Insurance Brokers Pty Limited (GSA).
GSA was the broker involved in the issuing by Ace Insurance Limited (Ace)
of certain Investment Management policies to Astarra Capital Limited in
respect of the period 15 September 2009 to 15 March 2011.1 The cover
provided by the policies includes professional indemnity cover.
2. Astarra Capital Limited, later known as Trio Capital Limited (Trio) carried
on business as a funds manager. However, it failed and has gone into
liquidation. ASIC commenced an investigation into the failure of Trio, and a
number of former directors of Trio made claims (as Insured Persons) under the
policies in respect of their legal expenses. Ace initially provided such cover,
but has recently indicated that, in reliance upon certain admissions made by
Mr Shawn Richard, a former director and senior executive of Trio, of
fraudulent conduct in relation to managed funds, it is declining indemnity
under the policies to Trio and its directors, officers and employees. In so
doing, Ace relies upon on Exclusion 4.1(d) the Prior Known Fact exclusion.
3. Ace contends that Mr Richards dishonest conduct amounts to a Prior Known
Fact as defined in the policies, and, further, that it is entitled to deny indemnity
in respect of any claims where the relevant Loss is one which is directly or
indirectly caused by, or arising out of, or in any way connected with such
conduct. According to Ace, the claims made by ACT Super Management Pty
Limited on 7 March 2011 fall into this category, as will any claims that may
be made in the future which arise from such conduct.
1 The terms of the policies do not differ in any respect which is material to the issues about which I
have been asked to advise.
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4. GSA has challenged Aces position. It has suggested to Ace that various
former directors of Trio deny all knowledge of Mr Richards activities and so
should get the benefit of General Condition 6.9 (Proposal Disclosure) which
prevents certain information being imputed to Insured Persons. GSA says that
this has the effect of overcoming the Prior Known Fact exclusion.
5. My advice has been sought as to whether reasonable grounds might exist upon
which to challenge the basis of Aces denial of indemnity. I provided my
views on this question in conference on 7 June. In summary, I advised that
Aces position on the policy construction issue was stronger than that
advanced by GSA. However, there may be a reasonable argument available to
the effect that the Prior Known Fact exclusion is in substance concerned with
failures by the insured to disclose matters prior to the contract being entered
into, and hence cannot operate to exclude indemnity because to do so would
be to provide a remedy in respect of such a failure which stands outside the
exclusive code found within Division 3 of Part IV of the Insurance Contracts
Act (the Act).
6. The purpose of this Memorandum is to briefly set out the reasons for that
advice. Before doing so, I set out below the salient provisions of the policies.
7. Insuring clause 1.3 relevantly provides that Ace will pay to or on behalf of the
Insured all Loss arising from any Claim2 first made against the Insured in the
Policy Period for Wrongful Acts3 of the Insured .. while performing or
failing to perform Investment Services.4
8. I note in passing that the demands made on behalf of ACT Super Management
on 7 March 2011 seem to constitute Claims which satisfy the requirements of
insuring clause 1.3, and Ace has apparently treated them as such.
2 Any Claim must be for a Wrongful Act or series of related or continuing Wrongful Acts.
3 Wrongful Act is defined in clause 3.49.
4 Investment Services is defined in clause 3.22.
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9. Exclusion 4.1(d) provides that Ace will not pay for any Loss directly or
indirectly caused by, arising out of or in any way connected with any Prior
Known Fact.
10. Prior Known Fact is relevantly defined to mean any fact which:
(a) an Insured was aware of after the Continuity Date [15.3.08] but prior to the
commencement of the Policy Period [15.9.09], and
(b) the Insured knew, or a reasonable Insured would have considered, at any
time after the Continuity Date but prior to the commencement of the
Policy Period
might result in an allegation against an Insured of a Wrongful Act or might
result in an Investigation.
11. The Prior Known Fact exclusion must be read in the light of Extension clause
2.8 (Continuous Cover), which relevantly provides: Notwithstanding
Exclusion 4.1(d) Prior Matters ..Ace will pay Loss for any
Claim first made against the Insured during the Policy Period..arising
from a Prior Known fact provided that:
(a) the Claim would be covered under this Policy but for the operation of
Exclusion 4.1(d) Prior Matters; and
(b) the Insured has maintained without interruption Investment Management
Insurance with Ace or another insurer from the Continuity Date up until
the date this Policy commenced; and
(c) the Insured would have been indemnified under such policy in force at the
relevant time if the Prior Known Fact had been notified to the applicable
insurer when the Insured first became aware of it; and
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(d) neither the Claim nor the Prior Known Fact has been notified to Ace or to
any other insurer under any other policy; and
(e) there has been no fraudulent non-disclosure or fraudulent
misrepresentation to Ace in respect to such Prior Known Fact; and
(f) cover under this Extension will be in accordance with the terms,
conditions, exclusions and limitations. of the policy in force at the
time the Insured first became aware of the Prior Known Fact, but only
where such earlier policy affords no broader cover in respect of the Claim
than the provisions of this Policy.
12. Ace has asserted that this Extension does not apply because each of the
provisos of the extension are not satisfied. This may well be correct, but it
seems to me that this is an issue which needs to be considered further in the
light of details of any relevant cover which was in place during the period 15
March 2008 to 15 September 2009.5
13. Leaving that matter aside, and assuming that Mr Richard had the knowledge
described in Aces letters of 13 April 2011 by which they decline indemnity,
there seems little doubt that an Insured (being Mr Richard) was aware of facts
after 15 March 2008 but prior to 15 September 2009 which might give rise to
an allegation of a Wrongful Act against an Insured, and a reasonable Insured
would have considered at any time after 15 March 2008 but prior to 15
September 2009 that such facts might give rise to an allegation of a Wrongful
Act against an Insured. Accordingly, it seems that the definition of Prior
Known Fact is satisfied in relation to Mr Richards knowledge of such facts.6
5 There are some difficult construction issues involved with this provision, including what is meant by
the expression when the Insured first became aware of it in paragraph (c) see also the expression the policy in force at the time the Insured first became aware of the Prior Known Fact in paragraph (f). 6 Mr Richards acquired knowledge of at least some of those facts before 15 March 2008. However, I
think that paragraph (a) of the definition is unlikely to be read as requiring that the relevant Insured
only become aware of the facts after 15 March 2008. It is enough if the Insured was aware of the facts
at some time during the period 15 March 2008 to 15 September 2009.
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14. It would follow that, subject to the possible effect of other provisions of the
policy, exclusion 4.1(d) would operate so that Ace would not be bound to
indemnify in respect of any Loss which arises out of or is connected with any
such Prior Known Fact.
15. I think it is unlikely that General Condition 6.9 would operate to bring about a
different result. That condition deals with a number of matters in relation to
the proposal. It states that the declarations and statements in the proposal have
been relied upon by Ace, are the basis of the coverage provided by the policy
and are incorporated in and form part of the policy. It then goes on to state that
the proposal is to be construed as a separate proposal by each of the Insureds
and that with respect to statements made and particulars provided in the
Proposal no statements or particulars and no information possessed by an
Insured Person shall be imputed to any other Insured Persons, and only certain
statements or knowledge is imputed to the Insured Organisation.
16. I am instructed that the relevant proposal was signed by the then managing
director of Astarra Capital Limited (not Mr Richard). Question 13(b) asked
whether the Applicant, or any director, officer or employee was aware, after
enquiry, of any fact, circumstance, act or omission which may give rise to a
claim. The answer given was No. So, at least in so far as the proposal was
construed in accordance with General Condition 6.9 as a separate proposal by
Mr Richard as an Insured, the statement in answer to the question 13(b) would
be regarded as a misrepresentation. General Condition 6.9 then provides that
neither such statement nor any information possessed by Mr Richard would be
imputed to any other Insured Person.
17. However, the operation of exclusion 4.1(d), which concerns knowledge, does
not require any knowledge to be imputed to an Insured. In its terms, exclusion
4.1(d) requires that an Insured must be aware of a certain fact which might
result in an allegation against an Insured of a Wrongful Act (or an
Investigation), and either the Insured must know or a reasonable Insured
would have considered that such fact might result in an allegation against an
Insured of a Wrongful Act (or an Investigation).
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18. It is of course necessary for the exclusion to be read in the context of the
policy as a whole (see Selected Seeds Pty Limited v QBEMM Pty Limited
(2010) 85 ALJR 1 at [29] & [34]). However, bearing in mind that the
exclusion and General Condition 6.9 perform somewhat different functions it
seems unlikely that exclusion 4.1(d) would be held to have no application to
innocent directors merely because the knowledge of Mr Richard (which is the
subject of the Prior Known Fact and could have been disclosed on the
proposal in answer to question 13(b)) cannot, by reason of General Condition
6.9, be imputed to them.
19. In order to counter Aces reliance upon exclusion 4.1(d) an argument could be
raised to the effect that the exclusion, viewed as a matter of substance,
operates in relation to matters which the insured was under a duty to disclose
prior to the making of the contract of insurance (see s21 of the Act) and
provides a remedy in respect of a failure to so disclose which goes beyond
the remedies provided in the Act, thereby infringing s 33 of the Act.
20. Section 33 provides that the provisions of Div 3 of Part IV are exclusive of
any right that the insurer has otherwise than under the Act in respect of a
failure of the insured to disclose a matter to the insurer before the contract was
entered into. (It should also be noted that by s52 of the Act a provision is
void if it would have the effect of restricting or modifying, to the prejudice of
a person other than the insurer, the operation of the Act.)
21. I am not aware of any cases in which it has been held that a provision of a
contract of insurance governed by the Act purports to give remedies wider
than those given to insurers under Div 3 of Part IV. However, the argument
has been put in relation to provisions similar to exclusion 4.1(d), and such
arguments have not been dismissed.
22. In Permanent Trustee Australia Limited v FAI General Insurance
Company Limited (1998) 153 ALR 529 the argument was put in relation to a
limitation on retroactive cover. The policy provided for unlimited retroactive
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liability omitting claims or circumstances which are known to the insured
prior to the inception of this insurance. Hodgson CJ in Eq at 568 held that as
a matter of construction the provision only applied where the insured knows
the circumstances as circumstances which might give rise to a claim. On the
facts the provision did not apply but at 589 his Honour stated: If the
retroactive clause had the effect of excluding liability for something which
was in substance a non-disclosure, then I think s33 would in any event prevent
the retroactive clause excluding liability.
23. It is not known whether the earlier case of Pech v Tilgals (1994) 94 ATC
4206 was cited to Hodgson CJ in Eq. In that case, Dunford J took a different
approach in relation to a provision which excluded claims arising from any
circumstances of which the insured was aware prior to the commencement of
the insurance and which a reasonable accountant in the insureds position
would at any time prior to the commencement of cover have considered may
give rise to a claim. His Honour held that the exclusion did not apply on the
facts, but went on to state that the exclusion was not void under s52 for
modifying the operation of the Act relevant to non-disclosure because it was
not concerned with non-disclosure and the claims specified are excluded
whether the circumstances are disclosed or not so the remedies in s28 are
not excluded or modified.
24. The above cases were referred to by Conti J in Permanent Custodians
Limited v ARMA Pty Limited (2006) 14 ANZ Ins Cas 61-707 at 75,636-7 in
relation to an exclusion which excluded claims arising from circumstances of
which the insured was aware prior to the Insurance Period and which the
insured or a person in the insureds position ought reasonably to have realised
to be circumstances which might result in a claim. On appeal, in Macquarie
Underwriting Pty Limited v Permanent Custodians Limited [2007]
FCAFC 60 Allsop and Buchanan JJ at [28] stated that the contention of the
insured that the exclusion was in substance a non-disclosure provision which
offended s33 of the Act was arguable. They went on to note that insurers of
claims made policies often attempted to identify the notification of a claim
within the policy period as an essential attribute of the cover, rather than a
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contractual condition of the policy regulating the conduct of the insured. Some
similarity with the case before them was discerned, where the insurers by the
exclusion were attempting to exclude from cover matters which would
otherwise be disclosable. Their Honours said: The aim may readily be seen to
be definitional, but it is arguable that s33 is engaged.
25. This issue is without doubt difficult. It plainly raises important issues,
touching as it does upon the ability of liability insurers, in contracts governed
by the Act, to restrict the extent to which retroactive cover is given (that is,
cover for claims which arise from acts which occur before the making of the
contract). Nonetheless, as matters currently stand, the point must be regarded
as reasonably arguable.
26. Of course, even if exclusion 4.1(d) was not available to Ace in this case, it
may well be able to rely, as against innocent directors, upon failures by the
insured to comply with the duty of disclosure. Even if no fraudulent non-
disclosure was established Ace would be in a very strong position to contend
that had Mr Richards activities been disclosed it would have either declined
to give any cover at all, or imposed a specific exclusion, such that any liability
it would otherwise have for claims arising out of such conduct should be
reduced to nil (see s28(3) of the Act). The question whether such defences
would be available as against innocent directors is beyond the scope of that
which I have been asked to consider, but I note that it may depend upon
whether they are regarded as parties to the contract (or merely persons with
rights under s48 of the Act7), and upon the effect of General Condition 6.9.
10 June 2011
Chambers RJH DARKE SC
Liability limited by a scheme approved under Professional Standards Legislation
7 See CE Heath Casualty & General Insurance Limited v Grey (1993) 32 NSWLR 25.
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