Directors and officers (D&O) insurance and criminal conduct

One of the main benefits of Directors and Officers (D&O) insurance in practice is the cover that it provides for defence costs in civil, criminal and regulatory proceedings. D&O policies generally exclude coverage where the director's liability to a third party is found by judgment, award or admission to be based upon criminality or dishonesty, and even in the absence of any such term the common law would imply the limitation that policyholders cannot seek indemnity for the consequences of their own deliberate wrongdoing.

The problem in applying this limitation to defence costs is that, until the proceedings against the director have concluded, there is no way of knowing whether the director has indeed committed a criminal or dishonest act. For that reason, it has become more or less standard for D&O policies to include wording of the type recently considered by the Federal Court of Australia in Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd's Syndicate 2003 [2018] FCAFC 119, namely:

"If a Claim alleges a Wrongful Act or illegal or improper conduct as described in the Dishonest or Criminal Intent/Improper Conduct Exclusion, then We will advance Defence Costs and Representation Expenses in respect of such Claim until it is found by way of an admission by You, judgment or adjudication that such Insured did in fact commit such Wrongful Act or engage in such illegal or improper conduct and any amounts previously advanced shall be repaid to Us by You within thirty (30) days following a request by Us for such repayment."

By this wording, defence costs are paid as they are incurred, and remain payable up to the point at which the director is found guilty of, or admits to, a crime of dishonesty. Funding at that point ceases and the sums paid to the director are repayable to the insurers.

It has been the experience of insurers that it is frequently impossible to recover sums advanced by way of costs, and that of itself has given rise to a question - yet to be resolved - of whether sums repayable but not recovered go to reduce the aggregate liability of the insurers towards other directors and officers covered by the policy.

However, a more fundamental question has been discussed. Is it possible for an insurer who has agreed to pay defence costs under a clause such as that above to seek to avoid or cancel the policy for the company's non-disclosure on placement of the very conduct forming the basis of the proceedings against the...