D&O Policies - all to be revealed? Access to Directors' and Officers' Insurance Policies
Section 247A of the Corporations Act 2001 (Cth) (Corporations Act) enables a member of a company or registered investment scheme to apply to the Court for an order that they be allowed to inspect the books of that company or registered investment scheme, provided that the member is acting in good faith and the inspection is for a proper purpose.
There is a growing line of authority that members of a company or registered investment scheme may use section 247A to apply for access to a company's insurance policies in order to determine whether to commence proceedings or pursue a claim against the company and/or its directors and officers . A recent decision by the Federal Court of Australia, London City Equities Limited v Penrice Soda Holdings Limited  FCA 674 , confirmed this.
London City Equities Limited (LCE) is a shareholder in Penrice Soda Holdings Limited (Penrice). LCE sought to investigate its concerns regarding the discharge of duties by the directors of Penrice and whether to commence proceedings or pursue claims against them in that regard. LCE applied for authorisation to inspect certain categories of Penrice's books under section 247A of the Corporations Act, including Penrice's directors' and officers' liability insurance policies (D&O Policies).
What was decided?
Justice Robertson of the Federal Court of Australia followed the decisions in Merim and Snelgrove .In Merim, Merim had an 8% shareholding in Style Limited (Style). Merim made an application under section 247A of the Corporations Act to inspect the books of Style, which included Style's D&O Policies, when Merim became concerned about Style’s sudden financial decline and whether the directors had misrepresented Style’s position to its shareholders in relation to its forecasts. The Federal Court of Australia made orders allowing the inspection of the Style's D&O Policies on the basis that it would be relevant to Merim's decision whether to apply for leave to commence proceedings on behalf of Style in its name against any directors or officers of Style.
Similarly, in Snelgrove, Justice Le Miere sitting in the Supreme Court of Western Australia granted the plaintiffs' application under section 247A for access to the company's insurance policies. Justice Le Miere held that:
"There is good reason to give the plaintiffs leave to commence proceedings against the company for an order under s 247A so that they may ascertain the existence and extent of any relevant insurance cover held by the GSMAL. If GSMAL does not have insurance cover against the plaintiffs’ claims or the limit of the cover makes the plaintiffs proposed action commercially not viable then it is to be expected that the plaintiffs will not proceed with the action. That would spare the company the inconvenience of having to defend the proceedings and spare the plaintiffs from proceeding with a commercially not viable proceeding..."
"Books of the Scheme" should be given a broad construction so as to facilitate the inspection of documents relevant to the affairs and interests of the Scheme. I find that the insurance policies are books of the Scheme..."
"It is a proper purpose to inspect the company’s books for the purpose of investigating whether there are good grounds for seeking to bring a derivative action or a personal action against the company. The purpose of the plaintiffs in seeking access to the relevant insurance policies is to assist them in considering the economic viability of pursuing their proposed action against the company. That is a proper purpose." (emphasis added)
In London City Equities Limited v Penrice Soda Holdings Limited, Justice Robertson was not persuaded to deviate from Merim and Snelgrove and accordingly, he granted LCE's application for access to Penrice's D&O Policies under section 247A of the Corporations Act.
Notwithstanding the trend towards granting access to insurance policies, insurers should be alive to the fact that there are circumstances where access will be refused, particularly if there is any suggestion that the application for access is an abuse of process. Lehman Brothers Australia Ltd v Wingecarribee Shire Council is an example of a decision where access was refused.
In Lehman, Wingecarribee Shire Council sued Lehman Brothers on the basis of alleged misrepresentations in relation to investment in collateral debt obligations. Lehman Brothers subsequently entered into administration, and the administrators made a recommendation that the creditors enter into a Deed of Company Arrangement (DOCA). The DOCA provided for certain releases to Lehman Brothers and its directors. The Council thereafter applied for orders requiring Lehman Brothers to produce copies of its professional indemnity insurance policies . The motivation for seeking these documents was to assist the Council to decide whether its claim would be covered by insurance and, with this knowledge, decide whether to enter into the DOCA.
The Council's application was granted at first instance by a single judge of the Federal Court of Australia, in reliance upon its power under section 23 of the Federal Court Act 1976 (Cth) and the court's inherent power to do justice. Lehman Brothers appealed that decision on the basis that nothing had been identified that constituted an abuse of process or frustration of court processes. In allowing the appeal, the Full Court of the Federal Court observed that:
"There was no evidence to suggest that the draft DOCA was likely to be passed because of the failure by the administrators to provide the information about the respondent’s insurance arrangements. Mr Hutley submitted that the DOCA needed to be approved by the majority of the creditors by poll and not just by value. But there was nothing to indicate that the alleged absence of sufficient information had any likely impact on the outcome of that poll."
"For those reasons we do not think that the abuse identified on appeal is substantiated. We do not think that the abuse identified by the learned primary judge is substantiated either. Even if the conduct of the other Lehman companies were shown to be directed at terminating the Council’s claims through the adoption of the DOCA, it is impossible to see why that might justify an order that this respondent — whose administrator his Honour accepted to be acting in good faith — should produce its insurance arrangements."
What should you do?
D&O Policies and Professional Indemnity Policies are almost invariably claims made and notified policies, meaning that insureds are required to notify their insurers of claims and/or facts and circumstances that may give rise to claims within the period of insurance. Notification of facts "that might give rise to a claim" within the period of insurance is important if an insured is to later rely on section 40(3) of the Insurance Contracts Act 1984 (Cth), which provides that any claim subsequently made arising out of those notified facts is to be treated as a claim made during the period of insurance, even in the absence of a deeming provision to the same effect in the policy. In order to avoid a possible breach of notification obligations and as a matter of precaution, companies and their directors and officers should consider notifying their insurers when they become aware of an application under section 247A of the Corporations Act to access their insurance policies.
Legal advice should be obtained when an insured faces an application seeking production of its insurance policies either under section 247A of the Corporations Act or under the various rules of the Courts. It should not however be assumed that the Court will automatically provide a shareholder or a third party with access to a company's insurance policies. The circumstances of each case will need to be determined on its own merits.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.