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Directors & Officers insurance – Exclusion for director gaining personal advantage (AUS)

25 March 2023 Patrick Bracher, Norton Rose Fulbright
Patrick Bracher, Norton Rose Fulbright

Patrick Bracher, Norton Rose Fulbright

The Federal Court of Australia found in March 2023 that a claim under a Directors & Officers Policy was excluded because the director had gained personal advantage from his wrongful act to which he was not legally entitled when he concealed information to avoid cancellation of a contract held with another company owned and controlled by the director. The policy excluded loss that resulted in the director “gaining any personal profit or advantage … to which he or she was not or is not legally entitled”. There is no reason to limit the scope of the words “any personal advantage”.  The expression is sufficiently broad to embrace a commercial opportunity or to encompass the avoidance of a negative commercial event such as the risk of cancellation of a contract.

The director concerned was a director of both the insured company and a contracting company which had agreed to design and construct a residential aged care facility to be completed within a specific time. The construction company got into serious financial difficulty including garnishee orders by the tax authority for considerable sums of money ultimately reaching about A$1.8 million. The severe financial distress of the company was the substantial reason why the work on the project was not progressing and the director would have known by May 2015 that the company was not in a financial position to complete the building work on time. The director deliberately did not disclose these facts to the employer company of which he was also a director.

The definitions in the policy of ‘liability’, ‘wrongful act’, ‘claim’, and ‘loss’ are familiar terms in any South Africa D&O policy. The court had no difficulty in finding that the exclusion applied and the claim failed, as it would in South Africa on similar facts.

Hakea Holdings v Neon Underwriting Limited [2023] FCAFC 34

First published by: Financial Institutions Legal Snapshot

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