Operation of personal advantage exclusions in D&O policies

The Full Court of the Federal Court of Australia (Colvin, Button and Jackman JJ), has dismissed Hakea Holdings’ appeal in Hakea Holdings Pty Ltd v Neon Underwriting Limited for and on behalf of the Underwriting Members of Lloyds Syndicate 2468 [2023] FCAFC 34 in relation to the conduct of one its directors. The appeal considered two matters of construction in relation to the company’s D&O policy: the operation of the personal advantage exclusion clause; and the meaning of “claims first made” in relation to ‘claims made and notified’ policies.

The primary issue on appeal was what constituted a “personal advantage” to which the relevant director was “not legally entitled’, for the purposes of the exclusion in the policy.

Unsurprisingly, the Full Court applied the principle articulated in West Wake Price & Co v Ching [1957] 1 WLR 45 - when interpreting a policy for insurance, the relevant inquiry is on the substance of the insured’s conduct, not the manner in which a third-party claimant frames its case against the insured.

The trial judge had found that the director had contravened s 180 of the Corporations Act 2001 (Cth), by deliberately withholding information from Hakea Holdings, for the purpose of keeping a multi million dollar building contract between Hakea Holdings and the director’s company, on foot. The trial judge found this to be a personal advantage that flowed to the director. Justices Colvin and Button agreed. Their Honours held that, as a result, the insured director was not legally entitled to the advantage. As such, they held that the exclusion applied.

Justice Jackman went a step further. His Honour held that the exclusion was also enlivened by the director’s conduct which, as a matter of substance, amounted to a contravention of s 182 of the Corporations Act. His Honour reached that conclusion despite the primary judge having made no finding as to s 182 (as Hakea Holdings had abandoned its pleaded s 182 case at trial).

Jackman J reasoned that the words “personal advantage” in the exclusion should be given their ordinary and natural meaning, encompassing “any matter which makes the director or officer better off or improves his or her circumstances”. And further, that the absence of a legal entitlement to the advantage required an analytical focus on whether the advantage gained was “against the law for the director or officer to pursue in the circumstances”. Justice Jackman found that, for the purposes of s 182, the director’s omissions and positive misrepresentation amounted to a ‘use’ of the director’s position on Hakea Holding’s board. Given the findings of the trial judge, that the director’s withholding of information from the board (and his positive misrepresentation) were deliberate and for the very purpose of securing himself an advantage, Jackman J held that the elements of s 182 were made out. As such, so was the exclusion.

The Court also considered the insurer’s contention that Hakea Holding’s ‘claim’ had not relevantly been ‘made’ under the D&O policy within the policy period. The insurer argued that a ‘claims made and notified policy’ requires the insured to have actual acknowledge of the claim, within the policy period.

The Court rejected that argument. Justices Colvin and Button (Jackman J agreeing) held the policy only required written notice of the claim to be ‘received’ by the insured director. The written notice had been sent to an operative email account of the director. While there was no evidence that the director used the account at the time the notice was sent, the Court concluded that notice had been ‘received’ for the purposes of the policy.

Liz Steer, led by Stuart Lawrance SC, and instructed by Jonathan Newby at Colin Biggers & Paisley, appeared for the insuring Lloyds Syndicate on the appeal and at first instance.

Click here to view the profile of Liz Steer.

© Copyright 2018 Alinea Chambers. Telephone (02) 9165 1400. Level 33, 52 Martin Place, Sydney NSW 2000