Beleaguered Hanover Finance says it was misled by insurance giant – and new All Blacks sponsor – AIG into thinking it had full cover for prospectus releases.
The fight over Hanover Group's $20 million policy for directors and officers insurance, through AIG subsidiary Chartis Insurance New Zealand, opened in the Auckland High Court today.
The court battle is crucial for the directors of the three Hanover finance companies – Hanover Finance, United Finance and Hanover Capital – who face substantial civil claims from the Financial Markets Authority over claims made in its December 2007 prospectus and a subsequent extension.
Hanover is also pursuing a $2 million insurance claim case against QBE Insurance.
Hanover lawyer Nathan Gedye says: "The extent of cover available under the 2007 policy for both claims and defence costs is a matter of pressing importance."
About 36,500 investors were affected when Hanover Finance froze $550 million of assets in July 2008.
Mr Gedye told Justice Chris Allan that despite what had been agreed, AIG imposed a $400 million upper limit exclusion for prospectus capital raisings, included in formal documents sent after the verbally-agreed renewal.
Hanover says an agreement was made between its insurance broker Grant Dawson and AIG underwriter Vincent Barker in October 2007 for D&O cover for all prospectuses issued by Hanover.
Mr Dawson's file notes from his conversations with Mr Barker are expected to be crucial.
AIG raised the $400 million exclusion in February 2011, when Hanover made a claim for investigation costs under its 2007 policy.
Hanover has called five witnesses, including Mr Dawson and its chief financial officer, Michael Ross.
'Awakening' in 2007
Mr Gedye says Mr Ross became aware of the $400 million exclusion in October 2007.
"There is no explanation available as to why Hanover or its broker in previous years did not wake up to the lack of cover. Hanover's case is based simply upon an awakening in October 2007 and the events that followed."
Mr Dawson assured Mr Ross in writing AIG had agreed to cover all Hanover's prospectuses on issue.
Hanover Finance's public offer amounts always exceeded the $400 million limit, with offers of roughly $1 billion in 2005, 2006 and 2007.
United Finance public offers have been more than $500 million annually since 2005.
Hanover promoter Eric Watson and director Mark Hotchin are to appear in court next year to defend charges they made misleading statements in Hanover's last prospectus in December 2007 and in the March 2008 prospectus certificate.
The action was brought by the FMA.
Fellow Hanover directors and promoters Greg Muir, Sir Tipene O'Regan, Bruce Gordon and Dennis Broit will also defend 10 civil actions under the Securities Act.
If the FMA is successful, the Hanover Six could be ordered to pay up to $5 million each in penalties.
A Serious Fraud Office investigation into Hanover Group is continuing.
Messrs Watson and Hotchin are also suing former New Zealand Shareholders' Association chairman Bruce Sheppard for defamation.