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Supreme Court 21 August 2003

Porter v GIO Australia Ltd & Anor

[2003] NSWSC 668

Other
INSURANCE DIRECTORS AND OFFICERS INSURANCE PERIOD OF COVER DATE OF ENTRY INTO POLICY WHETHER NON CORPORATIONS LAW

Citation: Porter v GIO Australia Ltd & Anor [2003] NSWSC 668
Court: Supreme Court of New South Wales, Equity Division (Commercial List)
Date: 21 August 2003
Judge(s): McClellan J

Background

The plaintiff was the former Managing Director of a public insurance underwriting and broking company (referred to here as the company). He was removed from his position in November 1998 following a controversial transaction in June of that year, in which the company, through a wholly owned subsidiary and at the plaintiff's suggestion, purchased a large parcel of shares in a third-party corporation. The transaction attracted regulatory scrutiny and ultimately led to both civil proceedings brought by the company against the plaintiff and criminal proceedings, which were discontinued by way of nolle prosequi (a formal decision by the prosecution not to proceed).

The plaintiff sought indemnity for his legal costs from the company's directors and officers (D&O) insurer (the first defendant) and also pressed claims against the company itself (the second defendant). His claims encompassed the D&O policy, a professional indemnity policy, indemnity under the company's Articles of Association and at common law, and a board resolution that he argued gave rise to an enforceable obligation of good faith. The plaintiff also contended that a Deed of Release he had previously signed did not bar his claim for criminal defence costs.

The matter was extensively litigated, with hearing dates spread across 2002 and 2003.

  • Whether the D&O insurer was entitled to rectification of the policy
  • What the operative period of cover was and when the plaintiff entered into the policy
  • How the insuring clauses and exclusion clauses in the D&O policy should be construed
  • Whether the plaintiff's conduct constituted dishonest, fraudulent, or criminal conduct so as to enliven an exclusion
  • Whether the plaintiff was involved in a contravention of section 205 of the Corporations Law (which prohibited a company from providing financial assistance for the purchase of its own shares)
  • Whether the claim was notified during the policy period
  • Whether an official inquiry commenced before the policy period, affecting coverage
  • Whether the plaintiff made fraudulent misrepresentations or failed to disclose material matters to the insurer
  • Whether the plaintiff was entitled to indemnity under a professional indemnity policy
  • Whether the insurer was estopped from relying on grounds not previously raised and whether it acted in bad faith in obtaining documents
  • Whether the company's Articles of Association or the common law entitled the plaintiff to indemnity
  • Whether a board resolution created an enforceable obligation of good faith and whether the company breached it by cancelling the policy
  • Whether a nolle prosequi amounts to an acquittal or a judgment in the plaintiff's favour for indemnity purposes
  • Whether a Deed of Release signed by the plaintiff barred his claim for criminal defence costs, and whether it would be unconscionable for the company to rely on it

Decision

McClellan J dismissed the plaintiff's summons in its entirety, finding against him on the claims for indemnity under both the D&O policy and the professional indemnity policy, and under the company's Articles of Association and the asserted common law and equitable bases. The cross-claim by the company succeeded.

On the insurance claims, the court found that various hurdles, including the construction of insuring and exclusion clauses, the notification requirements, and the conduct of the plaintiff in connection with the Clifford transaction, defeated the plaintiff's entitlement to indemnity. The court considered whether the plaintiff's involvement in the transaction amounted to conduct that was dishonest, fraudulent, or criminal, and also examined whether an official inquiry had commenced before the policy period commenced, each of which bore directly on coverage.

On the company indemnity claims, the court rejected the argument that a board resolution created an enforceable contractual or equitable obligation of good faith requiring the company to maintain insurance for the plaintiff's benefit. The court also found that the cancellation of the GIO policy, while likely motivated in part by a desire to deny the plaintiff recovery, was not driven by that motivation in the relevant legal sense. The court further found that the Deed of Release was effective to bar relevant claims, and that it was not unconscionable for the company to rely upon it.

On quantum, McClellan J noted that, had liability been established, the evidence and submissions tendered were insufficient to fairly determine damages, and the appropriate course would likely have been a referral to a Master.

Orders Made

  • The plaintiff's summons was dismissed.
  • The company (second defendant) succeeded on its cross-claim and was entitled to a verdict against the plaintiff.
  • The parties were directed to bring in short minutes of order in accordance with the judgment.
  • Costs were reserved for argument.

Key Takeaways

  • A nolle prosequi (prosecution discontinuance) does not necessarily amount to an acquittal or a judgment in favour of the accused for the purposes of a D&O indemnity claim; the precise policy wording and the circumstances of the discontinuance require careful analysis.
  • Where a general release is contained in a Deed, its scope is limited by reference to the matters in the contemplation of the parties at the time the Deed was entered into, following established principles on the construction of general words of release.
  • A board resolution providing for directors' insurance does not automatically give rise to an enforceable contractual obligation or a duty of good faith requiring an employer to maintain a particular policy for a removed executive's benefit.
  • Exclusion clauses in D&O policies addressing dishonest, fraudulent, or criminal conduct are construed in the context of the specific conduct alleged, and involvement in a corporate transaction later found to contravene the Corporations Law can engage such exclusions depending on the facts.
  • In dismissing the plaintiff's claim, the Supreme Court confirmed that the burden on a plaintiff seeking indemnity under a D&O policy requires satisfaction of each element of the insuring clause and survival of all applicable exclusions, with any non-disclosure or fraudulent misrepresentation to the insurer providing an independent basis to defeat recovery.

Legislation and Cases Referenced

Legislation:
- Corporations Law, s 205 (prohibition on financial assistance for purchase of company's own shares)
- Corporations Act 2001
- Insurance Contracts Act 1984 (Cth)
- Trade Practices Act 1989 (Cth)
- Contracts Review Act 1980 (NSW)
- Corporate Law Economic Reform Act 1999 (Cth)
- Corporate Law Reform Act 1994 (Cth)
- Australian Securities & Investments Commission Act 1989 (Cth)
- Insurance Agents and Brokers Act 1984 (Cth)

Key Cases:
- Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25
- McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579
- Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
- Bank of Credit and Commerce International SA (in liquidation) v Ali [2001] 1 All ER 961
- Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
- Chew v R (1991) 107 ALR 171
- Royal Botanic Gardens & Domain Trust v South Sydney City Council (2002) 186 ALR 289
- Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187
- United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
- Howard Smith v Ampol Petroleum Ltd [1974] AC 821