In the recent decision of AIG Australia Limited v
Jaques  VSCA 332, the Court of Appeal of the Supreme
Court of Victoria discussed the definitions of non-executive and
executive directors in the context of policy interpretation.
AIG Australia Limited ('AIG') issued an
Investment Management Insurance Policy ('the
policy') to the Australian Property Custodian Holdings
Limited ('Holdings'). Mr Jaques was a
director of Holdings.
The policy insured all executive directors for losses up to $5
million, in the aggregate. Relevantly, non-executive directors were
entitled to a further $1 million in cover.
Mr Jaques notified AIG of claims made against him for wrongful
managerial acts and sought the additional $1 million in cover on
the basis that he was a non-executive director. Mr Jaques, who was
a director of Holdings from 1 March 2001 until 6 July 2011,
contended that he first became an executive director on 26 June
2007, when he was formally appointed by the board of Holdings.
Although AIG accepted that Mr Jaques was a non-executive
director until 6 April 2004, it denied the claim in circumstances
where the alleged wrongful managerial acts were said to have
occurred on various dates in 2006, 2007, and 2008.
AT FIRST INSTANCE
In finding that Mr Jaques was a non-executive director at the
time of his wrongful managerial acts, Dixon J made the following
The policy definition of non-executive director was
The essential characteristic of an executive director is their
discharge of executive functions in the management and
administration of a company. This is a question of fact, that is,
there must be evidence that the company has delegated executive
function to that director.
The trial judge found that there was no 'explicit act'
of Holdings that evidenced a delegation of power to Mr Jaques to
operate as an executive director until his appointment on 26 June
AIG appealed the decision at first instance alleging that the
trial judge erred in failing to find that Mr Jaques ceased to be a
nonexecutive director on 6 April 2004. In short, AIG submitted
Critical to this characterisation is whether the director
represented themselves to the investing public, and whether they
were regarded internally, as an executive director.
A proper interpretation of the policy required that a
nonexecutive director should be defined by reference to all of the
Based on the facts, Mr Jaques did not fall within the
definition of a non-executive director during the relevant period
under the policy.
In support of its position, AIG pointed to the following
Directors' meeting minutes which referred to Mr Jaques as
an executive director.
The Corporate Directory in a Product Disclosure Statement which
referred to Mr Jaques as an executive director and which was signed
by Mr Jaques in his capacity as an executive director.
Mr Jaques' functions did not change upon his appointment as
an executive director on 26 June 2007.
Mr Jaques' apparent belief that he was an executive
director in April 2004.
Correspondence from Mr Jaques to potential acquisitions was
sent on Holdings letterhead and signed 'general manager',
representing that he was a Holdings executive.
The Court of Appeal unanimously dismissed AIG's appeal. In
doing so, the Court of Appeal relevantly stated that:
The trial judge's definition of executive director was
consistent both with authorities and the principle that a policy of
insurance, as a commercial contract, should be given a businesslike
In essence, the distinction between executive and nonexecutive
directors is whether the director performs executive functions in
the management and administration of the company.
The subjective views of investors, the board and the director
themselves are of limited relevance in construing the terms of the
In the absence of formal authority conferred upon a director by
the company, a director should generally be treated as a
Mr Jacques was an employee whose duties were limited to the
management of retirement villages, rather than the performance of
the executive functions of Holdings.
This decision provides a useful illustration of the court's
approach in determining whether a director is a non-executive
director under a policy. In the absence of a substantive definition
in the policy, this is a question of fact.
The substance of a director's functions is critical to this
question. If a director does not perform the organisational
activities of an executive director, the court will not
characterise them as an executive director, for the purposes of a
policy, merely because they have been held out as such to investors
and the public.
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.
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