Allegations of fraud against directors or officers frequently give rise to coverage issues under D&O insurance, particularly if insurers perceive that if the fraud allegations were true, there may have been a non-disclosure or misrepresentation of material information to them prior to policy inception.
Whether such allegations permit an insurer to withdraw cover, or whether the insurer must wait for independent determination, is critical: it may determine whether the insured has the resources to mount a proper defence at all.
In Liberty Managing Agency Limited & Ors v Marwan Chedid & Anor [2026] EWHC 2354 (Comm), the Commercial Court addressed that issue directly. It held that where the terms of the policy require fraud or other misconduct first to be established before the insurer can avoid the policy or rely on an exclusion, the insurer must continue to advance defence costs until that threshold is met.
The decision is a welcome reassurance for policyholders and particularly individual directors and officers. It confirms that where a D&O policy contains carefully negotiated provisions requiring fraud to be established before the insurer can avoid the policy or invoke an exclusion, those provisions will be given their full contractual effect.
It also demonstrates the capacity and resolve of the English Courts to act swiftly and decisively to ensure that insurers honour their contractual commitments to policyholders.
BACKGROUND
The Policy
The Claimant Insurers provided a D&O policy (the Policy) to Petrofac Ltd and others, as the second excess layer in Petrofac's programme, providing cover of £45 million in excess of £30 million.
The two Defendants were formerly officers of Petrofac and insureds under the Policy. They face criminal charges related to alleged bribery offences under the Bribery Act 2010, to which they have pleaded not guilty, with the trial due to commence on 2 November 2026.
With the primary and first excess layers of cover (totalling £30 million) on the point of exhaustion, the Defendants' ongoing defence costs were about to fall to the Insurers under the Policy.
By letters dated 10 August 2026, the Insurers purported to avoid the Policy on the basis of allegations of fraudulent misrepresentation and non-disclosure, relying to a material extent on aspects of the as yet unproven prosecution case.
The Insurers commenced proceedings, contending that they were entitled to avoid the Policy and to refuse to pay the Defendants' defence costs on the basis that they were uninsurable as a matter of public policy.
The Defendants' position was that the Policy required the Insurers to continue to advance their defence costs. They contended that they were unable to fund their own defence costs, so that the purported avoidance imperilled their ability to defend themselves at trial.
The relevant clauses
Central to the dispute were clause 5.1 (Conduct Exclusion) and clause 8.2 (Non-Avoidance) of the Primary Policy, both of which were incorporated into the excess policy. Of the two, clause 8.2 was the primary focus.
- Clause 8.2 provided materially as follows:
"The Insurer shall not avoid this policy or any severable part of the policy or exercise any other legal remedy on the grounds of misrepresentation or non-disclosure, except with respect to: 1. an Insured who has fraudulently misrepresented or fraudulently non-disclosed material information prior to the conclusion of this contract;…. where such fraudulent conduct is established by a final decision of a court, tribunal or regulator or by a formal written admission of the Insured."
- Clause 5.1 mirrored this structure, excluding the Insurer's liability for Loss:
"(1) arising out of, based upon or attributable to the committing of a deliberately dishonest or a deliberately fraudulent act by the Insured; or (2) for the gaining of any personal profit, remuneration or advantage by the Insured to which they were not legally entitled, where such behaviour or gain is established by: a) a final, non-appealable adjudication in the underlying proceedings; or b) a formal written admission by the Insured."
(emphases added)
Both clauses were designed to achieve the same result: the insurer's right to act depends on fraudulent conduct being established by an independent determination or formal admission, not by the insurer's own unilateral assessment.
PROCEDURAL BACKGROUND
The speed with which the matter was resolved is itself notable.
Robin Knowles J ordered the expedited trial of three preliminary issues on 19 August 2026. To further facilitate the speed of the process, he directed that there should be no factual witness or expert evidence, with the parties instead directed to agree a short Statement of Facts, reflecting that the points in dispute were ones of contractual construction, not disputed facts. The hearing took place on 9 September 2026, with judgment handed down by Jacobs J just two days later on 11 September.
That the matter moved from receipt of the avoidance letters to High Court judgment in a matter of weeks is itself significant: it reflects the Court's recognition of the precariousness of the Defendants' position and its willingness to act to uphold their rights under the Policy.
DECISION
Construction
The Court's starting point was that clear words are necessary before a court will conclude that the parties have agreed to take away rights or remedies otherwise available at common law. Jacobs J characterised avoidance at common law as a "self-help" remedy: the avoiding party simply walks away without first obtaining a court decision. The question, therefore, was whether Clause 8.2 contained sufficiently clear words to displace that default position by imposing a condition that must be satisfied before the Insurers could exercise that remedy.
The Insurers argued that the concluding words of Clause 8.2 were surplusage, doing no more than reflecting the ordinary position that an insurer who avoids must ultimately establish its case at trial. The Court rejected that argument. Jacobs J held that the concluding words ("where such fraudulent conduct is established by a final decision of a court, tribunal or regulator or by a formal written admission") clearly identify a further substantive condition which must be satisfied before the insurer may avoid.
Jacobs J held that the Defendants' construction made good commercial sense. Directors and officers pay for D&O cover precisely so that they will have the resources to defend themselves if allegations are made against them.
The importance of an independent adjudication, rather than the insurer's unilateral assessment (even if made in good faith), is a point which Jacobs J emphasised by reference to the Australian High Court's decision in Wilkie v Gordian Runoff Ltd [2005] HCA 17. In that case, Callinan J observed that adopting the insurers' construction would mean that “in a real and practical sense they would become the final arbiters of the extent of their obligations because their insureds will frequently lack the means to defend themselves adequately against the charges levelled against them unless they are put in funds to do so." Drawing on that reasoning, Jacobs J identified the risk of a self-fulfilling prophecy: an insurer's withdrawal of defence costs cover may increase the chance of the insured's defence to a criminal charge failing, which in turn strengthens the insurer's basis for resisting payment under the policy. There was, he said, therefore, “very good reason for the parties to include an obligation to fund defence costs pending the resolution of disputed issues."
Public policy
The Insurers argued that, as a matter of public policy, no contractual clause can protect an insured from the consequences of their own fraud. That principle was common ground. Jacobs J's conclusion, however, was that Clause 8.2 does not offend it.
The Court held that the relevant authorities address the consequences of proven fraud, and that there is no English case establishing that public policy prevents the parties from agreeing how their contract is to operate in the period between allegation and proof. If fraud is ultimately proved, the policy may be avoided ab initio and any defence costs advanced will be repayable. Clause 8.2 does not alter those consequences; it simply regulates what the Court described as the "gap" between present uncertainty and ultimate resolution.
In that context, the Court endorsed the reasoning of the Court of Appeal in Coulson v News Group Newspapers Ltd [2012] EWCA Civ 1547, in which McCombe LJ held that "[t]here is nothing contrary to public policy in one person providing funds to another for that other to defend himself against a criminal charge: the Criminal Defence Service does it all the time. I can see no objection to private persons agreeing to do so for consideration."
The Court also rejected the Insurers' reliance on section 232 of the Companies Act 2006 (which restricts certain indemnities provided by companies to their directors) as irrelevant: the Court was concerned with an insurance policy issued by the Insurers, not with any provision between the Defendants and Petrofac. The Court held that the implication of the Insurers' argument, that all such D&O policies protecting against allegations of criminal wrongdoing are somehow ineffective or impermissible, "would be a most surprising conclusion", not least given that the Policy was carefully drafted to exclude uninsurable losses (such as criminal fines) whilst expressly recognising the potential recoverability of defence costs for bribery allegations.
It followed that the Insurers remained obliged to advance the Defendants' defence costs.
Permission to appeal has been granted to the Insurers.
COMMENT
The decision, and the speed with which it was delivered, will provide comfort to policyholders, and particularly individual directors or officers.
It confirms that the Court will give full contractual effect to provisions designed to ensure that cover is not withdrawn on the basis of untested allegations of wrongdoing, and that the protections which D&O policies are intended to afford will be upheld.
More broadly, the decision gives effect to the parties' agreed allocation of the risk during the interim period between allegation and proof. Rather than the insured bearing the consequences of what may turn out to be a wrongful avoidance or an unjustified reliance on an exclusion, the insured's right to cover is preserved pending independent determination. An insurer cannot circumvent that framework by substituting its own unilateral assessment that fraud has occurred.
It also underlines the importance of careful scrutiny of D&O policy wordings. The outcome turned on the specific language of the non-avoidance and conduct exclusion clauses, and on the Court's willingness to hold the parties to what they had agreed. That is a useful reminder that the detail of these provisions deserves close attention, both at placement and when a coverage dispute arises.
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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