Hanover Group Holdings has lost its appeal against AIG Insurance New Zealand over what it had thought was extensive coverage of directors' and officers' liability for the failed finance company's prospectuses.
The company was appealing a ruling in the High Court last December that found Chartis Insurance, as the local AIG unit was then known, hadn't offered such comprehensive cover as Hanover had thought. The Court of Appeal upheld its view and dismissed Hanover's appeal. The $20 million policy was taken out in November 2007.
The judgment of Justices Mark O'Regan, Terence Arnold and Lynton Stevens found that while there was discussion between Hanover, its insurance broker Apex General and AIG about getting coverage for all prospectuses, it didn't definitely show AIG had agreed to extend cover. The renewed policy AIG actually sent to the finance company didn't reflect its understanding of what had been agreed. And apparently no one bothered to check.
"It appears that no one from Apex or Hanover considered the terms of the new endorsement 8 on receipt as no concern was raised with AIG at the time," according to the judgment given by Justice Arnold in Wellington today.
It wasn't until Hanover's financial woes became clear in July 2008 that the finance company found it wasn't covered. That month, the company stopped taking deposits and suspended repayments as part of a restructure plan while the Commerce Commission began an investigation into a possible breach of the Fair Trading Act by Hanover making misleading representations.
Hanover gave AIG notice of a possible claim and AIG disputed cover. Hanover then issued its proceedings to get the policy amended to reflect its understanding and in the alternative, that AIG itself breached the Fair Trading Act and should be made to honour its promise of full prospectus cover.
"Like the judge, then, we consider that Hanover has failed to meet its burden of establishing that there was an understanding that AIG would provide full prospectus cover," Justice Arnold said. "Accordingly, we consider that the claim for rectification must fail."
"Those involved in the discussions were sophisticated and knowledgeable business people, who can legitimately be expected to be alert to their interests and to record their respective positions, and any subsequent agreements, with some care and precision," he said.
Hanover was ordered to meet AIG's costs.
Hanover Finance froze $554 million of funds for its 17,000 investors after running into financial difficulties before convincing them to accept a disastrous deal where their debt was swapped for equity in Allied Farmers.
The Financial Markets Authority is pursuing Hanover's former directors and promoters in a civil suit. In April, the Serious Fraud Office said it wouldn't lay charges against any of Hanover's directors or promoters, including Mark Hotchin and Eric Watson, saying it had exhausted all avenues of investigation and found nothing to meet its threshold to pursue a prosecution.