Twenty seven insurance companies and Lloyd's syndicates (most based in the UK and key players in the financial institution's market) have successfully defended proceedings commenced by Towry Law plc and others (Towry Law) in the Supreme Court of NSW. The case concerned the construction of a financial institution's policy issued to Towry Law's parent company for the period 1999 to 2003 - the policy was written under a Jumbo lineslip.
The parent company acquired Towry Law during the policy period on 3 August 2001. Towry Law sought indemnity under the professional indemnity section of the policy for over AUD100 million paid to investors under a Hong Kong compensation scheme as a result of alleged mis-selling by Towry Law of a number of funds to its clients. Underwriters denied indemnity to Towry Law 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 acquisition). The effect of the retroactive date was to exclude a large portion of the loss as most of the clients invested in the funds prior to the retroactive date of 3 August 2001.
Putting the issue very simply, Towry Law argued that a retroactive date did not apply to the professional indemnity section on the basis that the term "Retroactive Date" was capitalised in the General Conditions (specifically General Condition 12B which related to acquisitions) but was not specifically referred to in the professional indemnity section. There was a dispute between the parties as to the construction of the policy and in its defence Underwriters also argued, in the alternative, rectification and estoppel. In a judgment handed down on 19 December last year, Underwriters succeeded on all three bases: construction, rectification and estoppel (see Towry Law v Chubb Insurance & Ors [2008] NSWSC 1352).
Towry Law conceded prior to the hearing that the evidence of the lead underwriter could in effect be relied upon by the rest of the market for the rectification and estoppel arguments. Without this concession Underwriters may have had to call every single underwriter to give evidence.
Although the outcome depended on the specific facts of this case, it is an interesting case as an Australian Court was required to examine in detail a policy written out of London and had to grapple with the idiosyncrasies of the London market.
McDougall J accepted Underwriters' evidence as to the industry meaning of the term "retroactive date" in that it was a phrase used to limit cover such that the insurance policy did not cover claims arising out of circumstances that occurred before the specified date. The Judge also acknowledged that the commercial purpose of including a retroactive date for subsidiaries acquired during the policy period and automatically covered was to limit Underwriters' exposure in circumstances where they did not have any underwriting information in which to make a decision or assess the risk of the new subsidiary. Finally McDougall J recognised that there was a greater need to have retroactive protection in 'long tail' cover such as professional indemnity cover, compared to 'short tail' cover such as bond.
Deacons acted for Underwriters in the defence of these proceedings so if anyone would like further information or a copy of the judgment please let us know. We are currently waiting to see if Towry Law appeals the judgment.
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