The Federal Court has found against AIG after the insurer argued the company securities part of its policy didn’t cover class action claims related to the Murray Goulburn dairy group.

The Endeavour River class action settled on June 24 2019 for $42 million while the Webster class action settled later in the year for $37.5 million, with no admission of liability for either proceeding.

AIG denied cover for Murray Goulburn Co-operative Co Ltd and subsidiary MG Responsible Entity Ltd (MGRE), saying traded units involved didn’t meet the securities definition, and exclusions applied given matters arose from a pre-listing product disclosure statement (PDS) and prospectus.

Class actions were launched after Murray Goulburn co-operative, which registered as an unlisted public company in 1950, moved ahead with a restructure that would allow farmers to retain control while also creating a vehicle to raise funds from other investors.

MGRE became the responsible entity for the MG Unit Trust, which listed on the Australian Securities Exchange on July 3 2015 after initial investments were made through off-market transactions.

Previous directors’ and officers’ insurance was replaced by a new policy that added companies securities Side C cover for July 29 2015 to September 30 2016, retroactive to the listing date. The annual premium including Side C cover was about double the previous AB policy.

AIG, Zurich Australian Insurance and Allianz Australia each had a one-third share of a $30 million liability limit, with the court dispute only relating to the AIG cover.

The Murray Goulburn entities argued Side C cover should apply to class action claims related to units purchased in the secondary market from the listing date.

Investors involved in the actions alleged breaches of continuous disclosure or misleading or deceptive conduct provisions over forecasts for the farmgate milk price and profits.

The pre-listing PDS provided to potential investors forecast a price of $6.05 per kilogram of milk solids and a fiscal 2016 net profit of $86 million. An August 31 2015 ASX announcement then warned a fall in commodity prices could cut the forecasts to $5.60-$5.90 and $66-79 million.

On April 27, the forecast ranges were revised to $4.75-5.00 and $39-42 million and the actual result, reported on August 24 2016, was a farmgate price of $4.80 and net profit of $40.6 million.

Justice Jonathan Beach rejected AIG arguments on whether risks were instead covered by investment managers insurance (IMI) or public offering of securities insurance provided by other underwriters, and dismissed a contention that the traded units were not securities.

The MG Unit Trust gave investors a beneficial interest in the assets of the trust, entitling them to the payment of distributions, he said in the judgment.

“The mutually known context in which side C cover was procured was the listing of the MGUT on the ASX, and denying the description ‘securities’ to the units would effectively denude the side C aspect of any application,” he said.

Justice Beach says upon listing MGRE repeated the financial forecast information in the PDS to the market and following the listing the class action claimants alleged it made further inaccurate forecasts.

“It was the omission of MGRE to issue corrective forecasts from the date of listing that was said to have given rise to liability,” he said. “This is the lens through which the class action claims are to be analysed, and when so viewed, any connection with the PDS was severed from the date of listing.”

Justice Beach says he believes transactions from July 3 fall within the scope of indemnity, or alternatively from August 31.

AIG also maintained services provided to unitholders by MGRE and Murray Goulburn Corporation Ltd fell within the definition of excluded professional services.

Justice Beach says AIG fails to properly identify what specific professional services had been provided or what “profession” is involved, and the class action claims are not linked causally to any failure to perform trustee or back-office services.

“I should note that I am not construing the term ‘professional’ in the insuring clause of a professional indemnity policy, I am construing and applying an exclusion,” he says “In that context, AIG’s high, wide but not handsome submission is to be rejected.”

The decision is available here.