Demarcation between PI and D&O Policy is a fine one
A Directors and Officers Liability Policy is a type of Professional Indemnity Policy that provides cover in different and narrower circumstances. The two policies are meant to dovetail together so that liability for a wrongful act is covered under one or the other, but not both at the same time. Drafting the two policies to create the demarcation between them involves relatively subtle changes.
Both policies share much in common:
1. They are both liability policies
2. They are both claims-made and notified policies
3. The both insure liability for wrongful acts (usually a negligent act or omission)
The only real difference between them is the capacity in which the insured is alleged to be liable. In a D&O Policy the insured must be allegedly liable in the insured’s capacity as a director or officer of the company specified in the policy. In a PI Policy there is no such constraint, although there is usually a similarly worded exclusion to the same effect. The greater the similarity between the two, the better, as this is more likely to lead a cleaner dovetailing of the two policies.
Where they are not similar, difficulties of interpretation can arise. A good example of this is the Court of Appeal’s decision in Fund Managers Canterbury Limited and Others v AIG Insurance New Zealand Limited  NZCA 325. The Court of Appeal allowed an appeal from a High Court decision finding that the PI Policy applied, and the D&O Policy did not. The Court of Appeal held it was the other way around.
In order to comply with the terms of a Trust Deed, Fund Managers Canterbury Limited (FMCL) was required to provide quarterly statements to a corporate trustee signed by two of its directors on behalf of all directors certifying various matters to the best of their knowledge and belief after having made all due enquiries. These matters included compliance with the Trust Deed and confirmation that the general manager of FMCL had provided written confirmation with each new mortgage advance that it met stipulated lending criteria.
Following substantial losses, the corporate trustee sued the directors of FMCL alleging they were negligent when providing the quarterly statements. The directors claimed under their D&O Policy in relation to this allegation. The company also had a PI policy, which extended in the usual way to directors and employees.
The insurer accepted the claim was covered under either the D&O Policy or the PI Policy arranged by FMCL. The insurer decided the PI Policy applied, not the D&O Policy. The High Court agreed. The Court of Appeal saw the matter differently.
The insurer accepted the D&O Policy insuring clause applied. However, it said the following exclusion applied:
This Policy does not provide payment for Loss in connection with any Claim made against the Insured:
… attributable to the Company’s … performance of professional services for others for a fee … including but not limited to services rendered in the following areas:
– financial adviser
– investment adviser
– real estate syndicator
In relation to the PI Policy, the insurer said the following exclusion did not apply:
This Policy does not provide cover in connection with any Claim:
Director or Officer brought against an Insured as a director, officer or equivalent executive,
The Court of Appeal noticed that the key words used in the insuring clause of the D&O Policy were similar to the key words appearing in the exclusion in the PI Policy. This implied that what was covered under the D&O Policy was not meant to be covered under the PI Policy. This achieved the desired dovetailing of the policies. This supported the claim being covered under the D&O Policy not the PI Policy.
The Court of Appeal also held that the exclusion in the D&O Policy did not apply. The directors’ liability arose solely out of the certificates, which they signed in their capacity as directors. The High Court attributed the directors’ actions to the company and held the exclusion applied because the liability was in connection with ‘… the Company’s … performance of professional services for others for a fee …’. The Court of Appeal found this literal interpretation was contrary to the context and purpose of the policy because:
- The insurer accepted that one or other of the two policies applied and the directors’ actions in signing the certificates came clearly within the exclusion in the PI policy because only the directors could sign them, and the liability was alleged in their capacity as director (‘… brought against an Insured as director …’). By implication then, the D&O Policy applied.
- Interpreting the exclusion in the D&O Policy in the way contended for by the insurer robbed the D&O Policy of much of its cover.
- Exclusions are interpreted narrowly.
- The types of examples given in the exclusion of excluded services were quite different to what was being alleged against the directors.
The D&O Policy covered the claim. This policy provided the wider cover for the insured, which is what drove the dispute.
What this means in the real world
- Insurers must draft their PI and D&O policies carefully, so they dovetail together properly; the same fact situation should not be covered under both.
- This fact situation is a good example of liability arising in the capacity of being a director, as only directors could sign the certificates. Other situations can be less clear – a director may be responsible for a certain action or inaction, but was it in his or her capacity as a director or in some more general capacity as a senior executive with authority?
- That leads to the more difficult area of officers. This word usually has no meaning in the policy beyond its dictionary meaning and appears to include all employees. Most actions or inactions of employees will be in that capacity unless they are off on a trip of their own. How then is this cover different to the cover for employees under a PI Policy?
- The judgment is a good example of several rules of contract interpretation being used by the court:
- The interpretation of words is affected by their context.
- A contract (and in this case the two contracts) must be interpreted as a whole.
- An interpretation that renders the benefit of the contract to virtually zero is unlikely to be adopted.