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Court of Appeal ruling to prompt professional indemnity rethink

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[LONDON]—A professional indemnity insurance ruling related to the collapse of Italian dairy giant Parmalat S.p.A. will prompt companies with affiliate units overseas to reassess their professional indemnity insurance cover, experts say.

Grant Thornton International cannot claim on its professional indemnity insurance policy for losses relating to the multibillion dollar collapse of Collecchio-based Parmalat, the Court of Appeal in London ruled.

The judgment will be welcomed by professional indemnity insurers, but will make umbrella organizations with overseas members look closely at their insurance arrangements, according to the claims director of London-based Brit Syndicates Ltd.-a unit of Brit Insurance Holdings P.L.C.—which won the case.

Overturning an earlier High Court ruling that had dismissed Brit's claim for a declaration of non-liability, three appeal court judges concluded that nondisclosure by Italaudit S.p.A.—formerly known as Grant Thornton S.p.A.—meant that there was no cover available to the umbrella organization, GTI.

GTI, along with Deloitte and the Bank of America, is being sued in the United States for billions of dollars by the bankruptcy administrator of Parmalat, which collapsed at the end of 2003.

Parmalat's lawsuit alleges that the auditors and bank helped prolong fraud at the company. The case has been suspended until next year and New York judge Lewis Kaplan has recently told all parties to consider a global settlement.

GTI, incorporated in Illinois, is the umbrella corporation that manages and maintains a worldwide organization of member firms that practice under the Grant Thornton name. GTI has no practice or clients of its own, according to court papers.

GT Italy, a member firm until it was expelled in January 2004, was, along with 93 others, a named member firm under the Brit policy. GTI was not listed in the schedule of member firms, but an extension to the policy stated that GTI "is included as an assured firm, but solely in respect of claims made against GTI arising from claims made against a member firm of GTI insured by the terms and conditions of this policy."

The policy, underwritten in the London market and led by Brit, ran from December 25, 2003 to December 14, 2004. GTI is believed to be self-insured more than $20 million.

According to the Appeal Court ruling, the financial woes of Parmalat "were disclosed to the public in December 2003. These problems led to allegations against GT Italy, as auditors of a subsidiary of Parmalat, which resulted in its expulsion from membership of GTI."

GT Italy never made a claim under the policy "and indeed it is questionable whether it had any claim under the policy since its involvement with Parmalat was not international work as defined by the policy," according to Lord Justice Waller.

However, proceedings were commenced in the United States on January 8, 2004 naming GT Italy and GTI as defendants, GTI being alleged to be liable as an entity in control of GT Italy, according to the court.

According to a letter dated May 18 2005, GTI had already incurred some $2.2 million (€1.7 million) in defense costs.

"By letters dated August 1, 2005, Brit notified GT Italy that it was avoiding the policy as against GT Italy for non-disclosure or relying on a breach of warranty said to give rise to discharge all of Brit's obligations to it thereunder. On the same date it notified GTI that avoidance "ab initio" as against GT Italy had the consequence that GTI was not to be included as an Assured Firm and that thus there was no insurance coverage for GTI," according to Lord Justice Waller.

In concluding, the judge agreed that "if GT Italy never had cover because they had failed to disclose matters such as those alleged against them, then they were not insured or covered for that claim and any claim by GTI does not arise out of a claim under the terms and conditions of this policy."

"I accept that at first sight, it may appear harsh that—as in the instant case—GTI can be sued and incur expenditure and then 'have the rug pulled from under them', but that harshness simply flows, as in any other case, if there is a dispute about the extent of the cover. If the claim against GT Italy was not within either limb of the policy—as indeed seems it was not—then still GTI might have expended money before being informed that there was in fact no cover," he ruled.

"The decision has clarified the situation for umbrella organizations," said Mr. Sewell. "It is a positive judgment for underwriters in that it confirms where an umbrella company is responsible for the procurement of insurance for its members and has proceedings issued against it for the actions of one of its member firms. When the member's actions subsequently causes the policy to be voided, then the claim against the umbrella company arising out of the member's actions should not be considered for coverage either," he explained.

Mr. Sewell noted that the ruling will make policyholders with similar structures examine their insurance policies carefully. GTI has applied for leave to appeal.