Exclusions operate successfully to exclude policy cover: DIF II - Global Co-Investment Fund LP v Babcock & Brown International Pty Limited [2019] NSWSC 527

13 May 2019, Supreme Court of New South Wales – Ball J


Babcock & Brown Limited (BBL) was a specialist investment and advisory firm, which collapsed in 2009. The businesses included a funds management business that was carried on through DIF Capital Partners Ltd, formerly known as Babcock & Brown Direct Investment Fund Ltd (the Manager) and its Investment Committed comprised Messrs Topfer, Green, Neilson, Nicholson and Prof Officer. BBL held operating and investment subsidiaries through Babcock & Brown International Pty Ltd (BBIPL), which was an intermediate holding company, and Babcock & Brown LP (BBLP), which was the main operating company through which BBL held assets in the United States.


Under a Management Agreement (the Partnership), the Manager managed the investments of the DIF III – Global Co-Investment Fund LP (DIF III Fund) which held the funds contributed by investors who became limited partners of the Partnership. Sole responsibility for the Partnership’s management was with DIF III GP Limited (the General Partner), and the services provided by the Investment Committee were provided to the Partnership through the General Partner. The Manager sponsored and promoted the DIF III Fund through a Private Placement Memorandum (PPM), the intention being that the funds raised would be invested in projects and businesses identified by the BBL group and its members (collectively, Babcock & Brown).

At about the same time the PPM was issued, Babcock & Brown was approached by Deutsche Bank, concerning the possible acquisition of Coinmach Services Corporation (Coinmach). Coinmach’s core business involved the leasing of communal laundries in multi-dwelling buildings, and the installation and servicing of laundry equipment in those buildings. The Coinmach Deal Team was established by Babcock & Brown for the purposes of considering the acquisition, supervised by Mr Topfer.


An agreement was ultimately reached to acquire all of Coinmach’s issued shares for US$1,460,920,000 (the Coinmach transaction). For that purpose, Babcock & Brown incorporated Spin Holdco Inc which acquired Coinmach through the merger of its subsidiary, Spin Acquisition Co, with Coinmach. RBS Equity Corporation (RBS Equity) underwrote equity of US$136m, the balance then came largely from various companies in the Babcock & Brown group and the Partnership, which all invested through Babcock & Brown Spinco LLC. The total equity investment of that company was US$176.3m, of which BBIPL invested US$67m and the Partnership invested US$25m. Despite agreement that on completion of the transaction, BBLP would have been entitled to payment of an origination fee of approximately US$21.6m, on the day that the acquisition completed, BBLP and RBS Equity, among others, entered into two escrow agreements by which amounts totaling US$21.5m and US$13,479,236.82 were held in escrow by Wells Fargo Bank to compensate RBS Equity for losses suffered on its investment in Coinmach.

Relevant policies


A primary policy and three excess policies (collectively, the PI policy) provided cover of up to $150m in respect of “loss resulting from claims made against the assured by third parties for civil liability provided such claims arise out of the provision by or on behalf of the assured of financial services to third parties and are first made during the policy period”. Under an extension in respect of circumstances notified during the policy period, provided that the assured’s management became aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a claim, and notice of those circumstances was given by the assured within 30 days of the expiration date of the policy period, then the subsequent legal proceedings in respect of which indemnity was sought must have been a direct result of any matter for which written notice had been given.

Exclusion 17

Excluded liability in respect of “any legal liability based on, arising out of, relating to or involving, directly or indirectly, any directorial act” which was defined to mean any act, error or omission by any director of the assured acting in that capacity.

Exclusion 28

Excluded liability in respect of “any liability, loss or expense, arising out of, based upon or attributable to, directly or indirectly, any conflicts of interest arising out of, based upon, relating to or in connection with investment banking activities or any research report, including, but not limited to:

(i) Conflicts between or among the interests of any assured, any research analyst, clients or customers of the foregoing, or purchasers of securities for which a research report was issued by, on behalf of, at the request of, or in the name of any assured, and

(ii) Conflicts between or among the interests of clients or customers of any assured.


A directors’ and officers’ liability insurance policy and a number of excess policies (collectively, the D&O policy) provided indemnity “with respect to claims first made against an insured during the policy period or an applicable discovery period or accepted as such pursuant to the ‘related claims’ condition and notified to the insurer as soon as practicable during the policy period or as applicable during the discovery period”.


  1. Excluded cover for claims arising out of, based upon or attributable to “the provision of third party professional services of any kind” (professional services exclusion).
  2. Excluded claims “brought on behalf of any outside entity in which an insured person serves or served in accordance with the ‘outside directorships’ extension” or “any US claim which is brought by or on behalf of any company or any insured person” (Insured v Insured US claims exclusion).
  3. Exclusion to “the improper use of position or information to gain any profit or advantage or cause detriment to any company… conduct involving a wilful breach of duty in relation to any company, or” any claim arising out of, based upon or attributable to “any criminal, dishonest or fraudulent acts or omissions” (conduct exclusion).

Defined “insured person” to include the directors and officers of the company and employees who were concerned with the management of the company.

Commencement of proceedings

The investment was not a success. In late 2009, Coinmach’s debt was restructured, and the existing shareholders’ interest in Coinmach was greatly reduced in exchange for a right to receive certain deferred profits.

DIF III – Global Co-Investment Fund LP and DIF III GP Limited (collectively, DIF III) commenced proceedings against BBIPL, BBLP, the Manager, Messrs, Topfer, Green, Neilson Nicholson and Prof Officer, RBS and RBS Equity, claiming the difference between its investment (US$25m) plus investment costs of US$1,093,562.77 less the amount already received.


DIF III alleged:

  1. That each of BBIPL, BBLP, Mr Topfer and Mr Green were promoters of the Coinmach transaction, and in that capacity owed fiduciary duties to the Partnership in relation to the Coinmach investment, which were breached by failing to disclose to the Partnership RBS’s position in relation to the transaction;
  2. That one or more of the defendants had engaged in misleading and deceptive conduct in contravention of s 1041H of the Corporations Act 2001 and s 12DA of the Australian Securities and Investments Commission Act 2001 – by approving the recommendation to invest in Coinmach, each member of the Investment Committee had represented to the General Partner that the investment was commercially advisable, and by failing to disclose RBS’s position in relation to the investment;
  3. That each member of the Investment Committee owed a common law duty of care in representing to the General Partner that the investment was commercially advisable and worthwhile and in providing services under the Management Agreement, which was breached by failing to disclose to the Partnership RBS’s position in relation to the investment, and failing properly to assess the investment.

DIF III sought recovery of the amount for which the Manager was liable from the insurers who had provided the professional indemnity insurance to Babcock & Brown (PI insurers).

The DIF III proceedings gave rise to a number of cross-claims, including cross-claims by BBIPL, BBLP and Messrs Topfer, Green, Neilson and Nicholson against the insurers who issued the D&O policy to Babcock & Brown (D&O insurers).


Denied liability to DIF III and to the cross-claimants: denied that a claim had been made during the policy period or that the assured’s management had become aware of circumstances during the policy period which could reasonably have been anticipated to give rise to the claim that was made.

With regard to members of the Investment Committee (other than Prof Officer): contended that the claim had not arisen out of “the provision by or on behalf of the assured of financial services to third parties”.

With regard to Messrs Topfer and Green: contended that the claim against them was not a claim for civil liability because the definition of civil liability only included claims in respect of a “dishonest, fraudulent, criminal or malicious act or omission on the part of any employee of the assured”, and Messrs Topfer and Green were not employees.


Denied liability: contended that when the members of the Investment Committee first gave their approval to the investment in Coinmach they were not acting as insured persons, as required by the definition of “wrongful act”, because in taking that decision they were not acting as a director, and so on, or taking part in the management of any company, including the Manager.


  1. The members of the Investment Committee, including Messrs Topfer and Green, owed fiduciary obligations to the Partnership in connection with the decision to invest in Coinmach, due to the vulnerability on the part of the Partnership to decisions of the Investment Committee and a degree of dependence on the decisions that the Committee took. – [149]
  2. Manager was ultimately responsible for making investment decisions on behalf of the Partnership, and consequently, the Partnership, and the General Partner, must have had a reasonable expectation that the Manager would tell them if it knew of facts which called into question the Investment Committee’s decision. – [260]
  3. The Investment Committee owed a duty to take reasonable care in conveying representations to the Partnership and the General Partner that the Coinmach investment was commercially advisable and worthwhile. – [282]


  1. Section 54 of the Insurance Contracts Act did not apply to the absence of awareness of facts, circumstances or events which could reasonably have been anticipated to give rise to the claim in respect of which indemnity was sought. – [342]
  2. Exclusion 17 did not apply: acts of members of the Investment Committee in approving the investment could not be described as acts of directors of the Manager in that capacity. – [354]
  3. Exclusion 28 depends on the connection between the “liability, loss or expense” on the one hand and the conflicts of interest on the other. – [355]
  4. There was a sufficient connection between the investment banking activities and the approval process. – [358]
  1. All failed: the D&O policy gave the person seeking an indemnity an option to notify circumstances within the policy period and treated any claim arising from those circumstances as a claim within the policy period. The claims that were made did not arise out of circumstances that were either notified during the policy period or later, in respect of which relief under s 54 of the Insurance Contracts Act was available. – [380], [381]
  2. The professional services exclusion applied to the services provided by the Investment Committee. – [399]
  3. The conduct exclusion did not prevent the claimants from recovering the legal fees they incurred, as if there had been a breach of duty, it did not involve any criminal, dishonest or fraudulent conduct. – [401]

The Insured v Insured US Claims exclusion did not apply as it was not established that the claim was a US claim and the claim was brought by or on behalf of the Partnership which was not a “company” or “insured person”. – [403]-[405]