The recent NSW Supreme Court judgement of Martin John Green
in his capacity as liquidator of Arimco Mining Pty Ltd (in
liquidation) v CGU Insurance Limited & Ors  NSWSC
825 addresses the need for companies and their directors to provide
full disclosure of their financial standing to their insurers
before entry into a policy of insurance.
In mid-December 1998 the directors of Arimco Mining Pty Ltd
(Arimco) provided a signed proposal form to its
D&O insurer, CGU, when arranging a renewal of the D&O
policy. Amongst other things, the proposal made representations to
the effect that Arimco was a financially strong company with a
strong profit and cash balance of over AUD12 million. On the basis
of the proposal, CGU issued a D&O policy to Arimco. However,
the financial representations in the proposal were incorrect. At
the time the directors provided the proposal to CGU, Arimco was in
fact in financial trouble and had a negative cash balance, and the
directors were aware of a proposed claim against Arimco for
approximately AUD15 million.
Shortly after CGU issued the policy, Arimco was placed into
liquidation and the liquidator issued proceedings against the
directors pursuant to s558M of the Corporations Act 2001
that the directors pay the liquidator the amount of debt incurred
by Arimco when it was allegedly insolvent. The directors settled
the claim and a judgment was entered against each direction for
AUD15 million. The directors then sought indemnity under the CGU
policy for the settlement amounts. CGU denied liability for the
settlement pursuant to s21 of the Insurance Contracts Act
1984 on the basis that the directors failed to disclose and
misrepresented the financial situation of Arimco in the proposal
form. CGU maintained that had the directors fully disclosed the
correct financial status of the company then CGU would have
insisted on the inclusion in the policy of an exclusion clause for
insolvency. The liquidator disputed this, saying that at best CGU
would have included an exclusion for any damages arising from the
proposed claim (which did not make up part of the settlement).
The NSW Supreme Court accepted CGU's argument and found
that, on the balance of probabilities, it would not have renewed
the Policy without imposing the insolvency exclusion if all
material facts had been disclosed. On this basis the Court found
that s28 of the Insurance Contracts Act reduced CGU's liability
to the directors to nil. The Court held the view that it is a
matter of commonsense that the financial soundness of a company and
its ability to continue to operate for the period of insurance is a
matter of fundamental importance to insurers when determining
whether or not to insure the company. Importantly for insurers, the
Court found that the relevant consideration for determining whether
ss21 and 28 of the Insurance Contracts Act apply is what
the particular insurer would have done in the circumstance rather
than what a "prudent insurer" would have
Given that the current economic climate is resulting in more
companies going into liquidation, the possibility of claims being
brought against directors of companies by liquidators for insolvent
trading is increasing. It is therefore important that underwriters
retain good records of their underwriting decisions and in the
event of a non-disclosure similar to that by the directors of
Arimco, are able to demonstrate that they would not have issued the
policy on the terms that they did if full disclosure had been
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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