Australia: Another Case Of Non-Disclosure – D&O Insurance This Time

Last Updated: 8 September 2008

Hot on the heels of CGU Insurance Limited v Porthouse1, another non-disclosure decision has demonstrated the need for companies to disclose matters relevant to the risk of insolvency. On 18 August 2008, Justice Einstein, in Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited & Ors [2008] NSWSC 825, reduced CGU's liability to nil as a result of Arimco's non-disclosure.

The proceedings

The ARL Group, through Arimco Mining Pty limited (in liquidation) (Arimco), operated mines at 3 locations. CGU issued a D&O Policy to Arimco and its directors for the period 31 December 1998 and 31 December 1999. The policy also provided D&O insurance to the directors and officers of the ARL Group.

On 14 March 1999, Mr Green was appointed voluntary administrator of Arimco and subsequently appointed liquidator. Mr Green commenced proceedings against CGU as the D&O insurer of Arimco and its directors and officers. The claim against the directors and officers was resolved. However, Mr Green pursued the claim against CGU in respect of debts totalling more than $21 million incurred between 1 February and 14 March 1999.

The essential issue

Amongst other things, in defence to the claim CGU asserted that the directors failed to disclose a range of matters regarding the financial position of ARL. These included:

(a) changes to the financial position of ARL in November and December 1998 and at the mines in the second half of 1998.

(b) the fact that Rothschild (the financier of the ARL Group) had investigated the financial position of the mines and expressed concerns about their value. Rothchild was intending to undertake a review of the business and, if unfavourable, ARL would be required to make payments in 1999 and 2000 which it would be unlikely to be able to meet.

(c) the fact that ARL had been notified that Leighton Contractors Pty Limited intended to commence legal proceedings for $15,000,000 and that ARL was using funds raised under a rights offer for a specific purpose (exploration) for an ulterior purpose.

By raising these issues CGU sought to rely upon section 21 of the Insurance Contracts Act 1984 (ICA) and invoke section 28 to reduce its liability to nil. CGU called evidence establishing that it would have included an insolvency exclusion if it had been fully appraised of the true financial position of the ARL Group.

The multi-stage process

Justice Einstein referred to the directors' obligations of disclosure under section 21 of the ICA and relevance of section 28, before conveniently setting out what his Honour referred to as the multi-stage process in assessing a series of significant factors identified by CGU that allegedly should have been disclosed. The questions which arose in relation to each factor were put as follows.

(a) did the directors know of the matter?

(b) if so, did the directors know that the issue was a matter relevant to the decision of the insurer whether to accept the risk and if so on what terms?

(c) if they did not, would a reasonable person in these circumstances be expected to know the issue was so relevant?

(d) if either (b) or (c) apply, was the company excused from the need to disclose on the basis of the matters in section 21(2)?

(e) even if the matters ought to have been disclosed or there had been a misrepresentation, would the insurer have issued the policy in the way that it did in any event?

(f) if it would not, what is the liability of the insurer under section 28(3)?

Legislative history

His Honour considered the legislative and judicial history of sections 21 and 28, referring extensively to the High Court decision of Permanent Trustee Australia Limited v FAI General Insurance Company Limited (in Liquidation)2, culminating in the test for disclosure described in Porthouse. Following the High Court decision in Porthouse, his Honour noted the following.

Thus, in applying sections 21 and 28, the focus is upon the particular insurer, not the "prudent insurer", and it is the decision making process of the particular underwriters which is under consideration.


In summary, his Honour found that the Annual Report did not reflect the company's position in December 1998, despite the insured's representations to CGU to the contrary, as there had been significant adverse changes to each of the operations involving the 3 mines which comprised the company's business operations. Additionally, the Annual Report did not disclose that Rothschild had already expressed strongly negative views about the company's operations and assets.

His Honour relied on the above factors to support a finding to reduce CGU's liability under the policy to nil based on the company and its directors non-disclosure and misrepresentation. His Honour found that had proper disclosure been made to CGU, it would have still written a policy but included an insolvency exclusion, which in the circumstances would have absolved it from any liability under the policy.

What it means for you

The Supreme Court has reinforced the importance of insured's fully disclosing their true financial position to insurers. The insured may not have the benefit of an insurance policy if it does not. The decision highlights the need for the insured to notify the insurer of any material changes to its financial position up to the inception of the policy and to not simply upon annual reports.

The proceedings also involved extensive evidence from CGU as to what would have transpired had it been made aware of ARL's financial position. The case demonstrates the importance of insurers having clear underwriting guidelines or other evidence to support assertions that a particular action would have been taken (in this case the inclusion of an insolvency exclusion) if full disclosure had been made.


1 [2008] HCA 30

2 (2003) 214 CLR 514.



Wendy Blacker

t (02) 9931 4922


Ray Giblett

t (02) 9931 4833




David Slatyer

t (07) 3231 1532


Jim Demack

t (07) 3231 1570


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