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

  • Legal Development 22 December 2020 22 December 2020
  • Asia Pacific

An investment made by a Babcock & Brown group company in Coinmach, a US laundry business, gave rise to a claim against the investment manager and claims for indemnity under the group's PI and D&O policies, when the investment failed.  A key issue in relation to the PI policy, being a claims made policy, was whether it responded to a claim for indemnity where no notification of a claim or circumstance had been made during the policy period. In 2019, the NSW Supreme Court held that it did not and that s54 of the Insurance Contracts Act 1984 did not cure the failure to notify. In March 2020, the NSW Court of Appeal came to the same conclusion. 


Babcock & Brown Limited (BBL) was a publicly listed company and a specialist investment and advisory firm.  DIF III – Global Co-Investment Fund L.P. (DIF III), was a limited partnership within the BBL Group. In 2007, DIF III invested US$25,000,000 in US laundry business Coinmach Services Corporation (Coinmach) on the advice of another BBL Group company, DIP Capital Partners Ltd (the Manager).

By 2009, the Global Financial Crisis had resulted in the investment in Coinmach being written down. DIF III lost more than US$23,000,000 and commenced proceedings against the Manager and, because the Manager was insolvent, its D&O insurers and PI insurers, claiming damages for lost investment returns and costs and indemnity under the policies. 

The PI insurers denied indemnity, principally on the grounds that the PI policy was a claims made policy, the Manager had not notified the claim (or any circumstances giving rise to the claim) during the policy period, and s54 of the 1984 Act could not cure the breach, because the Manager had not known of circumstances giving rise to the claim, and it was impossible to notify something of which the insured was not aware. 

First instance decision

The primary judge dismissed DIF III's claim against the Manager and the PI insurers. The judge held that DIF III had not established that it had suffered any loss or damage as a result of the admitted breach by the Manager.  In addition, the PI policy was found not to respond because the Manager was not on notice of a claim or potential claim during the policy period.

The Appeal

Before the New South Wales Court of Appeal, DIF III argued that the primary judge had erred in finding that DIF III had failed to establish that its loss was caused by the Manager's breach. The Court of Appeal upheld the primary judge's decision on that point. The difficulty for DIF III was that it had attacked certain key assumptions of the Manager as being invalid, unjustified or unreasonable, and had alleged a failure of due diligence by the Manager, but had not provided any evidence that the Manager would not have proceeded with the investment had it undertaken proper due diligence.  

Having reached that conclusion, it was strictly unnecessary to deal with any other ground of appeal, including whether the proceedings against the Manager were a third party claim covered under the PI policy. However, Meagher JA addressed that issue anyway.

The PI policy covered claims first made during the policy period and provided that a claim was considered to be made when the insured's management, including directors, the managing director, and members of executive committees established by the board, become "aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a Claim at any future time."  Notice of a claim had to be given at latest within 30 days of the expiry of the policy. If such a notice was given, subsequent legal proceedings or damages against the insured as a direct result of any matter of matters notified to insurers would be considered to be a third party claim first made during the policy period.

The policy period was 1 September 2008 to 1 September 2009.  DIF III commenced the NSW Supreme Court proceedings against the Manager in 2018. No prior notice was given to insurers.

DIF III contended that the Manager was nonetheless aware of circumstances during the policy period and the proceedings were the direct result of matters of which notice would have been given. Further, s54 of the Insurance Contracts Act cured the lack of notice. The Insurers did not contest the latter point, but argued that the Manager had not first become aware of circumstances during the policy period that directly resulted in the proceedings. Against that, DIF III relied on three emails which had come to the attention of Mr Nicholson, an Investment Officer of DIF III, during the policy period. 

The first email was dated 13 November 2008 and recorded views of another investor, BBGP, that the Coinmach investment was in a "distressed" position. Meagher JA found that there was no suggestion in that email that the Manager had done anything wrong or might be held responsible for third party losses if the investment failed.

The second email was dated 27 November 2009 and referred to earlier exchanges between Ms Tallintyre of Babcock & Brown and Mr Cummings of RBS. The email exchange related to discussions about the possibility that RBS, which had agreed to take up USD136 million of equity in Coinmach, might withdraw from that underwriting commitment, following the Lehman Brothers collapse in September 2007. Ms Tallintyre had described RBS's investment as "uncommercial". Meagher JA saw nothing in the emails that provided a sufficient or sound basis for thinking that a claim of some kind might be brought against the Manager.

The third email was dated 5 February 2009 and attached a memo from Mr Nicholson to the DIF Compliance Committee attaching a draft valuation of Coinmach as at 1 October 2008.  The valuation concluded that DIF III’s valuation of the Coinmach investment was $nil. Again, there was nothing in that email to indicate that the Manager might be the subject of a claim. 

The Deeming Provision

Reference was made to the English Court of Appeal decision in Euro Pools Plc v Royal & Sun Alliance Insurance Plc [2019] EWCA Civ 808, which set out the approach to be taken to the construction and application of deeming provisions, and the position set out 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". In line with the principles outlined in Euro Pools, Meagher JA recognised that that test was 'deliberately undemanding'. He also recognised that the principles set out in those cases must give way to the language of the particular clause. 

Here, he concluded there was nothing in the emails relied on by DIF III that indicated that DIF III or any other party had a basis for making a claim arising out of the conduct of the Manager in relation to the Coinmach investment. The distressed position of the investment was not in itself a reason to anticipate a claim against the Manager. The lack of due diligence by the Manager was also not a matter that could of itself be reasonably anticipated to give rise to a claim. There needed to be circumstances which indicated there was a "problem" that might of itself give rise to a claim, which was not the case here. The result was that an essential requirement of the deeming provision – that the insured's management must be aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a claim – was not satisfied.


The Court of Appeal decision confirms that deeming provisions in claims made policies that require knowledge of circumstances on the part of the insured will only apply to circumstances of which the insured is actually aware during the policy period – insureds cannot notify circumstances of which they are not aware. Where a dispute over knowledge arises, the burden is on the insured to show that the relevant knowledge or awareness first existed during the policy period.  Further, where knowledge of circumstances is required, section 54 of the Insurance Contracts Act cannot cure a failure to give notice of circumstances where the insured was not aware of the circumstances during the policy period. In all cases, it is necessary to consider the language of the deeming provision in order to determine the notification requirement.


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