Crewe should have told CGU – insurer wins due to non-disclosure – Akron Roads Pty Ltd (in liquidation) (No 3) [2016] VSC 657

Crewe Sharp Pty Ltd (Crewe Sharp) provided management consultancy services to Akron Roads Pty Ltd (Akron). This included Trevor Crewe (Crewe) acting as a director of Akron, during which time Akron incurred debts whilst insolvent.

Crewe Sharp and Crewe had a professional indemnity policy (the PI policy) with CGU Insurance Limited (CGU). In obtaining the cover, the broker essentially informed CGU that the services provided by Crewe Sharp to Akron were “strategic management consulting centred around HR services“. There was no disclosure that Crewe Sharp and Crewe provided director services.

The broker also obtained a quote from CGU for a directors and officers (D&O) policy (the D&O policy) on behalf of Crewe Sharp and Crewe. However, CGU and Crewe elected not to proceed, instead obtaining D&O cover from Chubb Insurance Australia Limited.

Akron and its liquidators brought proceedings against the directors of Akron, including Crewe, alleging breaches of directors’ duties by failing to prevent Akron from trading while insolvent. Crewe sought indemnity for the claim from CGU, which was denied.

Crewe Sharp subsequently went into liquidation, and Crewe had insufficient assets to cover the claim. Pursuant to the judgment of the High Court of Australia in CGU Insurance Limited v Blakeley² (Blakeley), the liquidators joined CGU to the proceedings to challenge CGU’s denial of indemnity. Please refer to our previous Case Note for further information regarding the Blakeley decision.

CGU’s position

The PI policy provided cover for civil liability incurred “in the conduct of the professional services“. CGU argued that the insuring clause was not triggered or alternatively that the claim could be excluded pursuant to the following exclusions:

“Claims … (if an insured is either an incorporated body or a director or officer of an incorporated body) arising from any act, error or omission of a director or officer of that incorporated body while acting in that capacity …” (directorship exclusion)

“We do not provide cover for any of the following claims (or losses or liabilities) or any associated costs … arising from a liability to pay trading debts, trade debts, or the repayment of any loans” (trading debt exclusion).

CGU also argued that indemnity was not available as a result of non‑disclosure.

Insuring clause

The Supreme Court of Victoria (the Supreme Court), applying the clause broadly, found that the insuring clause was triggered. His Honour Robson J held that the provision of an individual by the management consultancy firm to act as a director of Akron would fall within the business of provision by the insured of management consultancy. Accordingly the liability of Crewe to the liquidators was a liability incurred “in the conduct of management consultancy services”.

Further, his Honour stated that despite it being well-known that insurers offer D&O insurance which would traditionally cover this type of claim, there was no reason why a PI policy and a D&O policy could not overlap.

Exclusions

The Supreme Court, applying a very narrow interpretation, found that the directorship exclusion did not apply as the reference to “an incorporated body” in the exclusion was to be read as a reference to Crewe Sharp only, not Akron, and the claims did not arise from any act or omission done as a director or officer of Crewe Sharp.

In relation to the trading debts exclusion, the Supreme Court noted that trading debts were debts due to trade creditors. The Supreme Court held that the liability of Crewe was not to the creditors, rather, his liability was an entitlement of the liquidator to recover from the director. The Supreme Court found that while the claim arose from the incurrence of trading debts, it did not arise from a liability to pay those debts. Akron no longer had any liability to pay the relevant trade debts. The Supreme Court concluded that the trading debt exclusion was not enlivened.

Non‑disclosure

CGU contended that Crewe Sharp and Crewe had breached their duty of disclosure pursuant to s 21 of the Insurance Contracts Act 1984 (Cth), and its liability should be reduced to zero. Specifically, it had not been disclosed that they provided company D&O services to Akron.

The evidence of CGU’s underwriter was that, had she been aware, she would not have entered into the policy or, alternatively, would have included an endorsement that the policy did not cover any claim arising from any services provided to Akron.

The liquidators argued that CGU ought to have known that management consultancy could include the provision of D&O services, and relied on CGU’s underwriting manual, which provided a broad definition of management consultancy that did not exclude D&O services.

The Supreme Court found that the duty of disclosure was not satisfied. His Honour commented that a reasonable person would have known of the onerous duties imposed on directors and it had not disclosed that it provided such services when it informed CGU of its business activities. Further, a reasonable person would have known that D&O insurance was usually the subject of a separate policy. The Supreme Court accepted the underwriter’s evidence that, if matters that ought to have been disclosed were known, CGU would not have issued the PI policy.

The Supreme Court rejected the liquidators’ argument that the proposal form included obviously incomplete answers and CGU had therefore waived the requirement of compliance with the duty of disclosure. The Supreme Court also rejected the liquidators’ argument that, due to CGU’s entrenched view that the PI policy did not respond to director liability, it would have written the policy regardless of the disclosure provided.

The Supreme Court found that the liability of CGU was reduced to zero.

In respect of policy coverage, this decision highlights that a court will give a wide interpretation to an insuring clause and a narrow interpretation to exclusions when considering a party’s right to indemnity. A court will be reluctant to find that a policy does not respond, even in circumstances where the claim is not typically one which would fall within the cover provided.

This case highlights that a court will, in certain circumstances, allow an insurer to avoid indemnifying an insured based on non‑disclosure. An insurer is required to establish that had the relevant fact been known to it, it would not have issued cover or alternatively, issued cover on terms that would have excluded the relevant claim.