An insured company provided management consultancy services to Akron Roads Pty Ltd. In addition, the managing director of the insured company – Mr Crewe – acted as a director and as chairman, and sometimes as managing director, of Akron.

Akron became insolvent and went into liquidation. The liquidator sued the directors of Akron, including Mr Crewe, for incurring debts when Akron was unable to pay them. The insured company had a CGU professional indemnity policy with a $5million limit. The liquidator obtained a judgment by consent against Mr Crewe for $13million. Mr Crewe assigned to the liquidator the benefit of his cover under the policy in exchange for the liquidator accepting a payment of only $125,000 from him.

The liquidator pursued a claim against CGU.

A Supreme Court of Victoria judge decided that the policy only provided indemnity in respect of the actual loss, which was only $125,000.

More importantly, the judge agreed with CGU that, when taking out the policy, the insured had failed to disclose that Mr Crewe provided services to Akron in the form of an active directorship of that company. The CGU underwriter gave evidence that if the directorship of Akron had been disclosed, she would have asked the broker to tell her the percentage of income received by the insured for that directorship. If a large part of the income was so derived, she would have told the broker that it was not appropriate to offer the professional indemnity policy to the insured because it would not provide cover in respect of most of its services, namely director & officer services.

Further, the underwriter said that if she had been told that only a small proportion of the insured’s income was from director & officer services, she would have offered professional indemnity cover but subject to a specific exclusion in respect of services provided to Akron.

The judge accepted the underwriter’s evidence. He concluded that the non-disclosure was not fraudulent but decided that the prejudice to CGU was such that it was permitted to reduce its liability under the policy to zero (because it would not have granted the cover if proper disclosure had been made).

Akron Roads Pty Ltd (in liquidation) v Crewe

An attempt by the insured to get all of its liability risks covered by a professional indemnity policy, instead of taking out directors & officers cover, backfired. The underwriter’s position was assisted by a clear email trail with the broker.