(3) gives effect to the market understanding to which I have referred.
98 There is considerable force in Mr Meagher's submission that it would have been commercially absurd for the underwriter to stipulate for a retroactive date limitation in respect of cover under sections I to III but not for cover under section IV. The underwriters' evidence to that effect was substantially unchallenged (and, to the extent that it was challenged, unshaken). I accept it. I am comforted in accepting it by two considerations. The first is that the rationale offered - the distinction between the long-tail nature of cover under section IV, as opposed to cover under sections I to III - provides a sound commercial justification. The second is that the underwriters' evidence on this point was confirmed by the evidence of Mr Paul (Gary) Traill. Mr Traill was, at the relevant time, AMP's General Counsel. He said that he had ultimate responsibility (subject to the decision of the Board Compliance Committee and the Board) for AMP's Specialised Insurance Program (or "SIP") of which program the policy and its predecessors formed part. Mr Traill accepted that it would be unreasonable to impose on underwriters an obligation to accept "blind" a liability for "outstanding hidden claims". This was something that he would expect "wouldn't be covered" (T246-247).
99 Again, Mr Martin Wright (who was at all relevant times the managing director of Towry Law Insurance Brokers Limited and a director of the first plaintiff Towry Law plc), and who had substantial experience in insurance matters in general and the London market in particular, said that he would not generally expect underwriters to commit themselves to an acquisition "blind", when they knew nothing about it (T324, 327), and that underwriters would have been less likely to grant professional indemnity cover blind than to grant crime cover blind (T327-328).
100 Thus, on the totality of the evidence (including the plaintiffs'), I conclude that the construction of general condition 12(B) for which the plaintiffs contend does involve absurd or illogical commercial consequences. The construction for which the defendants contend does not.
101 I accept that the construction for which the defendants contend may appear to be inconsistent with the structure of the policy as a whole: involving, as Mr Pembroke submitted, an otherwise systematic distinction between exclusions of and conditions to liability (both particular and general), and a structural separation of those concepts. However, reliance on matters of formal structure can only go so far. Where there are other obvious indicia for the construction supported by those formal structural considerations, it is legitimate to take them into account. But where there are significant difficulties caused by that construction (as in my view is the case here), and where the structural considerations do nothing to dispel or alleviate those difficulties, considerations of structure cannot be dispositive. In any event, if it is correct to regard the relevant sentence as a condition of the automatic cover offered to relevant acquisitions, the significance of this point diminishes.
102 There are two other matters that support the construction for which the defendants contend. The first is a restatement of what I have said already: that it recognises, and gives effect to, what was at all relevant times the market understanding of a "retroactive date limitation" (see at [69] to [72] above). (Lest it be thought that, by referring not just to the actual words used in general condition 12(B) - "Retroactive Date - but to a "retroactive date limitation", I am begging the question, I point out that it was common ground that the words did import a limitation on claims for which indemnity would be offered. The issue was as to the nature of the limitation.)
103 The second matter is that it is sensible to talk of a retroactive date limitation in the context of automatic cover. Automatic cover is provided to acquisitions (and, under earlier policies, they were held covered) from the date of acquisition. That extension of cover was subject to a number of things, including that notice of the acquisition be given to underwriters within 60 days of acquisition. In a practical sense, the extension of cover to acquisitions was retroactive, because in the usual case it would have attached before the underwriters became aware that they were on risk in respect of the acquisition. Thus, the relevant sentence could be seen as reinforcing the proposition that it was the fact of acquisition (subject to subsequent notification and other matters), rather than the fact of notification, that operated to extend cover.
104 For those reasons, I conclude that general condition 12(B), and in particular the relevant sentence, is to be construed as the defendants submit.
105 It follows that the answer to question 1 is "yes"; and that answer flows through (to the extent necessary) to the other questions identified at [37] above.
106 However, for reasons to which I now turn, that answer does not deal in full with question 6.
Question 6
107 Question 6 involves two issues. The first is the construction of general condition 12(B). The second issue is the application of general condition 12(B), properly construed, to the factual circumstances relating to the acquisition of Towry Law. The first of those issues is answered by what I have said. The second is not.
108 It is common ground that, for the purposes of general condition 12(B), the date of acquisition of Towry Law was 3 August 2001. The shortfall policy commenced on 31 December 2002. In other words, by the time the short - fall policy incepted, the Towry Law companies were existing subsidiaries of AMP; they were not "acquired" during the term of the shortfall policy.
109 In those circumstances, the plaintiffs contend that even if general condition 12(B) were to be construed as I have said it should be construed, the cover afforded to the Towry Law companies under the shortfall policy is not subject to any retroactive date limitation.
The evidence
110 Mr Forbes Geekie, the underwriter who scratched the shortfall policy on behalf of the fourth defendant (Zurich), gave evidence on which the plaintiffs relied in connection with this issue.
111 It was suggested to Mr Geekie that, at the time he scratched the shortfall policy on behalf of Zurich, he knew that Towry Law was, and since September 2001 had been, a subsidiary of AMP. He said that he could not specifically recall knowing that, but agreed that he would have reviewed the information submitted in connection with the proposal for the shortfall policy. That information was said to include the details of all subsidiary companies for which coverage was required, including Towry Law. Mr Geekie did not recall "specifically" becoming aware that Towry Law was an existing subsidiary of AMP at the time the shortfall policy was scratched (T166) but agreed that it was "a fair assumption that he would have reviewed the proposal with care, paid attention to the identification of the subsidiaries that were identified in it and of the claims information relating to them (T166-167). Thus, Mr Geekie agreed, "it appears that Towry Law was within the AMP group at" the time when he scratched the slip for the shortfall policy (T167).
112 A little later, Mr Geekie was asked whether he intended, at the time of entry into the shortfall policy, "that Towry Law should be treated as an existing subsidiary for the purposes of the operation of the shortfall policy?". He agreed that "it's a fair assumption that if Towry Law was a subsidiary of AMP, [his] view was that they were covered under the policy terms and conditions (T172-173).
113 Ms Pheroza Edibam also gave evidence on this topic. She was the underwriter who scratched the slip for the shortfall policy on behalf of the fifth defendant (Great Lakes). She did so on 31 January 2003.
114 Ms Edibam agreed that she read the proposal for the shortfall policy before she scratched the slip. She said that she "would have read" whatever "is in the proposal form".
115 It is clear that the proposal for the shortfall policy described the Towry Law companies as subsidiaries of AMP.
116 The slip for the shortfall policy said that its form was:
J (A) plus follow form policy following Policy No. FB9901238.
NMA Lines Clause (542 NCC 00238)
117 The "conditions" stated in the slip included a condition:
(1) as per Policy No. FB9901238 as far as applicable
118 The conditions also included a "Prior Acts Exclusion". That exclusion read as follows:
PRIOR ACTS EXCLUSION
Any claim or loss based upon, arising out of, directly or indirectly resulting from or in consequence of or in anyway involving any actual or alleged acts, omissions, transactions, circumstances or events (hereinafter referred to as "Acts") which occurred or commenced (or are alleged to have occurred or commenced) prior to 31st December 2002 or any Acts being part of an interrelated series of such Acts where any one or more Acts in that series occurred or commenced (or are alleged to have occurred or commenced) prior to the above date in relation to all activities of the Pearl Group Limited, and/or London Life Holdings Limited and / or all subsidiary and all associated companies.
The parties' submissions
119 Mr Pembroke submitted that even if general condition 12(B) were to be given the construction for which the defendants contended, nonetheless, on that construction, the Towry Law companies were subsidiaries of AMP as at the date of inception of the shortfall policy, not subsidiaries acquired during its term. Thus, he submitted, whatever retroactive date limitation might be imposed by the terms of general condition 12(B) did not apply.
120 Mr Pembroke relied on the evidence of Mr Geekie on this point. I do not think that evidence of subjective understanding or intention is relevant to the question of construction.
121 Mr Pembroke laid stress on the "Prior Acts Exclusion" relating to Pearl Group and London Life. He submitted that this showed that the objective intention of the parties was that subsidiaries at the date of inception of the shortfall policy were to have unlimited retroactive coverage unless specifically agreed otherwise (as had happened with Pearl Group and London Life).
122 Mr Meagher noted that the Assured in the slip were described as "AMP Limited and as more fully described and agreed on Policy No. FB9901238". This showed, he submitted, that "there was to be no difference, as between the Shortfall Policy and the Policy, in relation to the entities which qualified as assureds under the various sections of those policies" (written outline of opening submissions, para 145.3).
123 Further, Mr Meagher noted that the sum insured under the shortfall policy was described as "part of" the limits of indemnity stipulated in the policy. This showed, he submitted, "that the Shortfall Policy was only intended to respond to claims that were also covered by the Policy, and was not intended to indemnify the "Assured" in respect of claims to which the Policy did not respond" (para 145.5). The risk was not for a portion of the sum of $41,656,000.00 limit under the shortfall policy. The risk was as to the limits of indemnity specified in the policy; an assured making a claim under the policy, to which claim both the policy and the shortfall policy responded, would be entitled to receive proportionate contributions from the underwriters on risk under the policy and the underwriters on risk under the shortfall policy.
124 Mr Meagher relied on condition 3 of the slip for the shortfall policy, which provided that amendments of any kind would follow amendments to the underlying policy, as agreed by syndicate SJB 1212. This showed, Mr Meagher submitted, "that the parties intended that the two policies operate in the same way and respond to the same claims and losses, subject only to the express exclusions and differences" between them (para 145.7).
Decision
125 The shortfall policy came into existence as a result of the extension to the policy effected by endorsement 8. A number of underwriters did not agree to the extension of the policy. As a result, there was a shortfall for the fourth year of cover (i.e., the extension provided by endorsement 8). Three underwriters came on risk via endorsement 8, and took up part of that shortfall. AON sent a draft slip around the market. After considerable negotiation, agreement was reached. Mr Geekie on behalf of Zurich and Ms Edibam on behalf of Great Lakes scratched the slip. Even so, the slip remained undersubscribed: Zurich and Great Lakes between them took only 38.5% of the $41,656,000.00 shortfall.
126 Although the shortfall policy was intended to form a portion of the overall cover afforded to AMP by the policy (as extended by endorsement 8) it remains the case that the shortfall policy comprises two separate contracts of insurance: one between Zurich and AMP, and the other between Great Lakes and AMP. The shortfall policy was made on the basis of a separate proposal, and that proposal disclosed (one assumes) all relevant information. The information disclosed included the identity of subsidiaries of AMP at the date of the proposal, including Towry Law.
127 If the shortfall policy operates as Mr Pembroke submits it does, then there may be (and in this case there would be) disconformity between the cover provided under the shortfall policy and the cover provided under the policy. On the other hand, if the shortfall policy operates as Mr Meagher submits it does, this consequence does not arise.
128 The description of the "Assured" in the shortfall policy refers back to those who are the "Assured" under the policy: AMP, its subsidiaries at the date of inception of that policy and subsidiaries acquired thereafter. Although the shortfall policy thus incorporates the Towry Law companies as falling within the description of the "Assured" it does so not because they were named as subsidiaries in the proposal but because, having been acquired during the term of the policy, they fall within that policy's definition of "Assured" by operation of general condition 12(B). It follows that, for the purposes of the shortfall policy, the Towry Law companies fall within the description of "Assured" because of general condition 12(B) - although as that condition applied to the policy, not to the shortfall policy. It follows in turn that their status as "Assured" is subject to the limitation imposed by general condition 12(B).
129 Put shortly, the Towry Law companies are among the "Assured" under the shortfall policy because they are among the "Assured" under the policy. They are among the "Assured" under the policy because of general condition 12(B), and thus subject to the limitations imposed by that condition. They are not among the "Assured" under the shortfall policy either because their existence as subsidiaries was disclosed by the proposal, or because of the operation of general condition 12(B) as it forms part of the shortfall policy.