Solving D&O (AB) policy wording dispute

This claims case study reflects a claim pursuant to our primary Directors and Officers' liability insurance (D&O) policy wording.

In March 2012, XYZ Pty Ltd, a large Australian oil private company (XYZ) contracted with a foreign investor, CIA (CIA). CIA agreed to invest AUD 5M into XYZ. In exchange for its investment, CIA earnt a return of 12.5% interest per quarter.

In April 2014, XYZ made the decision to convert CIA's AUD 5M into 5 million shares with a par value of AUD 1 and registered the shares in CIA's name. Consequently, CIA's lawyers sent a letter of demand to XYZ and its directors alleging that XYZ was prohibited from unilaterally converting the AUD 5M into shares. CIA alleged that it relied on representations made by XYZ and its directors which were misleading or deceptive. CIA also alleged that the funds conversion into shares constituted unconscionable conduct.  CIA demanded the return of its AUD 5M. XYZ refused to return the funds.

CIA commenced proceedings against XYZ and its directors for the return of the funds.  CIA alleged that XYZ made the following misleading or deceptive representations: 

1. A large Australian oil company was about to invest AUD 50M into XYZ with a further AUD 200M to be invested in the future;
2. XYZ would list on the Australian Stock Exchange in the short term;
3. XYZ and its advisers believed that investors would subscribe for XYZ shares at AUD 1.50 to AUD 2 per share in an initial public offering; and
4. The stated value of XYZ's assets was incorrect. 

XYZ and its directors denied each of the allegations.

Defence Counsel appointed by XYZ was a top tier firm that had significant hourly rates. XYZ decided to change lawyers and sought our assistance to appoint a panel firm in defending the claim. This resulted in a considerable cost saving for XYZ.

XYZ had an entrenched view that it should defend the litigation, based on bullish advice from the Senior Counsel that there were good prospects of defending the proceedings. XYZ felt that CIA's directors were sophisticated businesspeople with access to professional advice. Their good grasp of the English language meant that they understood the agreement they entered despite the fact that they were foreign investors. XYZ was not prepared to entertain any mediation or settlement negotiations.

XYZ's Defence Counsel considered that CIA's financial advisors did not advise it properly. Hence, CIA's financial advisors ought to be liable for any loss suffered by the firm. 

The matter ran to hearing. On the third day of hearing, XYZ's Counsel informed that the directors of CIA appeared to be credible witnesses in comparison to the directors of XYZ. As such, XYZ's Counsel's view on prospects of success diminished significantly. Counsel warned of a real risk that XYZ and the directors would be exposed to a finding of damages against them which exceeded the Limit of Liability.

We worked with the directors to ensure that we appointed the most appropriate defence counsel at a pivotal point of the proceedings and when time was of the essence.

We advanced defence costs to all directors. A small portion of defence costs was uninsured as XYZ was not entitled to coverage. This is because only the directors of XYZ were entitled to cover, but not the business entity itself. 

In addition, we supported the directors in vigorously defending the claim made against them and played an active role in challenging defence counsel to find ways to extricate the directors from the proceedings.

We ultimately resolved the claim within the Limit of Liability. We arranged for our panel firm whose rates were more favourable to defend the Insured, and there was more uneroded limit which was spent on indemnity rather than defence cost.   

The resolution of the claim provided comfort and certainty to the directors that they were not personally financially exposed as there was a real risk that there would be an uninsured exposure.