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Directors and Officers Insurance and Material Non-Disclosure & Misrepresentation (Australia)

08 August 2022 Donald Dinnie, Norton Rose Fulbright

In this judgment the court considered the insured’s duty of disclosure and the insurers’ ability to avoid the policy under the relevant Australian legislation.

The question turned on what was called the Iraq File Note written in November 2010.The insurers contended that the contents should have been disclosed before renewal of the policy in 2011.

The court confirmed that a duty of disclosure is owed pre-inception, that the common law applied, and that the knowledge of a corporation may be established either by knowledge of the persons who constitute the ’directing mind’ of the corporation such as the board of directors or knowledge of individuals who are agents of the corporation for the purposes of dealing with the issue at stake.

While certain of the officers with such knowledge had left the insured’s employment at the time that the disclosures had to be made, the court found that their knowledge prior to their departure could be imputed to the insured and reaffirmed an earlier judgment that “knowledge imputed to a company should not be treated as capable of simply being forgotten or lost at the death of a director… A corporation cannot cause itself to shed knowledge by shedding people”.

After extensive consideration and analysis of the evidence and cross-examination of various witnesses the court was satisfied that a hypothetical reasonable person in the position of the insured would have considered that the allegation by the relevant Chief Operating Officer (as contained in the Iraq File Note) of an agreement to pay, and further opportunity to pay a nominated sub-contractor at an above market price so that the relevant insured company could “win” the contract for the Iraq work was a matter that ought to have been disclosed to the insurers pre-inception of the 2011 cover. That is because those facts if true could clearly give rise to losses that would be covered by the 2011 policy.

The court reached that conclusion because:

It was objectively reasonable that the matters recorded in the Iraq File Note if true were very serious and could lead to the Losses as defined in the relevant policy

The statements were made by the Chief Operating Officer responsible for the contracts in question and were far removed from a mere rumour by a third party. And very soon after the relevant note was disclosed to the insured’s lawyers information was provided to the Australian Federal Police and relevant regulatory authorities and the board initiated reviews including reviews of The Insured’s Risk Management Practices and Tender Practices. When those steps were taken the insured did not know whether the allegations in the Iraq File Note were true but those steps taken on legal advice were appropriate and demonstrates conduct of a reasonable hypothetical insured with the knowledge of the allegations recorded in the note.

The relevant Chief Operating Officer actually considered the seriousness of what was being communicated and he knew that if what he had been informed of was true, it could lead to claims against the company.

In addition to the failure to disclose the information, the insured had also made an actionable misrepresentation in its relevant proposal because the signed declaration amounted to representation that after having made enquiries of all appropriate staff it was not aware of any facts which might give rise to a claim against any of its directors or officers apart from the facts which were included. Yet the staff who should have been consulted included those who knew about the information contained in the note and no reference was made to the Iraq File Note facts.

Having heard evidence from the relevant insurers, the court concluded that the evidence supported the insurers’ case that had there been disclosure of the information concerning the Iraq File Note those insurers would not have entered into the 2011 policies on the same terms without including liability exclusions for losses attributable to the circumstances referred to in the Iraq File Note.

While Australian law of non-disclosure includes statutory provisions regarding the proportionality of the insurers’ response, a similar outcome is likely under South African law on these facts.

First published by: Financial Institutions Legal Snapshot

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