A worrying development for directors and officers following recent events is that some insurers have sought to decline to advance defence costs, merely upon an unproven allegation of dishonest or fraudulent behaviour. On 7 April 2005, the High Court of Australia declared in one case before it that, on the particular policy wording, the denial was ineffective while in another judgment delivered the same day, based on different policy wording and circumstances, the denial was upheld.
Wilkie v Gordian Runoff Limited  HCA 17
Daniel Wilkie, executive officer or employee of FAI Insurance Limited or a subsidiary of FAI, was an insured under a policy of insurance held with GIO Insurance Limited (now known as Gordian Runoff Limited) and RE Brown Syndicate at Lloyds of London (together GIO).
On 29 May 2003, criminal proceedings were brought against Mr Wilkie as a result of information gathered by the Australian Securities and Investments Commission. The allegations, the subject of the criminal proceedings, were said to arise as a consequence of Mr Wilkie’s actions as an officer of FAI General Insurance Company Limited.
Mr Wilkie has not admitted these offences, nor have the matters proceeded to trial.
Mr Wilkie duly notified GIO of the criminal proceedings and sought its consent to advance his defence costs of those proceedings. GIO denied indemnity and asserted that by reason of its denial, it was not obliged to advance to Mr Wilkie his defence costs.
Two important aspects of the GIO policy are worth noting.
- The clause concerning advancement of defence costs did not confer upon GIO a discretion to advance costs provided certain conditions had been met.
- The relevant exclusion clause depended upon proof that the subject conduct had 'in fact' occurred. 'In fact' was defined in the policy to mean that the conduct had been established to have occurred following the adjudication of any court, tribunal or arbitrator.
The only basis upon which GIO purported to deny indemnity was in reliance upon the dishonesty exclusion which had not yet been established in any proceeding.
Decision of the High Court
On 7 April 2005, the High Court of Australia unanimously held that GIO’s denial did not entitle it to refuse to advance defence costs, since the basis for the denial, that is, reliance upon the dishonesty exclusion, had not been established.
Chief Justice Gleeson and Justices McHugh, Gummow and Kirby held (at ), that '[t]he exclusion clause does not found a denial of indemnity for a Claim unless and until the phrase "in fact" operates in its defined sense'.
Accordingly, where an exclusion clause contemplates proof of its constituent elements prior to its operation, such proof will need to be available at the time of denial of indemnity, for such denial to be effective.
By arming insureds with the funds to properly defend themselves, this construction avoids the potential for insurers to become the final arbitrators of the extent to which they are liable, in circumstances where an insured would otherwise be unable to meet the allegations made against them.
Rich v CGU Insurance Limited; Silbermann v CGU Insurance Limited  HCA 16
On 7 April 2005, the High Court of Australia also delivered its judgment in the high profile cases brought by Mark Silbermann and Jodee Rich against their insurer, CGU Insurance Limited.
The High Court reversed its previous decision to grant special leave to Messrs Silbermann and Rich to appeal decisions of the New South Wales Court of Appeal.
The rationale for this reversal was that the question to be decided by the High Court would not be determinative of the issues as between the parties. Further, by accepting particular aspects of the decision of the New South Wales Court of Appeal, the applicants had placed themselves in a position where the answer they sought from the High Court would be inconsistent with answers to other questions which they had already accepted.
The case in substance, however, turned on policy wording which conferred a discretion on the insurer. The insurer had also sought, in the same proceeding, a declaration that the policy was void for fraudulent non-disclosure or misrepresentation. Both of these considerations affected the result, in contrast to Wilkie’s case.
What these decisions mean for directors and officers
The Wilkie decision provides a valuable insight into the potential operation of particular directors and officers liability insurance policies. Whether this decision will apply to a particular policy, will largely depend upon the extent to which that policy is similarly worded and the rationale for an insurer’s denial of liability.
The Rich and Silbermann decisions provide a stark reminder that the approach to any indemnity dispute will be critical. It is imperative that in the event that recourse to a policy is required, insureds carefully consider their approach to, and response provided by, their insurer. A failure to properly consider the potential ramifications of different policy wordings and strategies may leave the insured without a remedy.
If you would like any further information in relation to these decisions or an analysis of the likely approach to particular policy wording, please contact one of our insurance specialists.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.