The appeal decision of the Full Federal Court in AIG Australia Limited v Kaboko Mining Limited confirmed that an insolvency exclusion was not triggered where a cause of action by a company against its former directors did not contain allegations of insolvency, notwithstanding that the directors’ actions arguably led to the company’s insolvency.

Background

The matter concerned an appeal from a Federal Court decision on a preliminary issue in a claim brought by a mining company (mining company) against its former directors. The mining company alleged the directors breached various duties owed to it, resulting in the mining company suffering loss and damage. The directors made claims under a Directors’ & Officers’ (D&O) liability insurance policy in respect of their potential liability.

The preliminary issue was whether the D&O insurer could rely on the following insolvency exclusion endorsed to the policy:

“The Insurer shall not be liable under any Cover or Extension for any Loss in connection with any Claim arising out of, based upon or attributable to the actual or alleged insolvency of the [mining] Company or any actual or alleged liability of the [mining] Company to pay any or all of its debts as and when they fall due.”

The insurer argued that the directors’ breaches led to a demand on the mining company to repay advances made to it by a resources company (who had agreed to purchase manganese ore from the mining company) which in turn led to the mining company’s insolvency.

At first instance, the insurer was unsuccessful in establishing that the exclusion was triggered and it appealed to the Full Federal Court.

Appeal

On appeal, the insurer focused on the terms ‘Loss’ and ‘Claim’ in the exclusion. The insurer argued that in the absence of reference to the nature of the liability or to the act, error or omission that may give rise to a claim, it was unnecessary to consider particular allegations of breach made in the proceedings. Rather, the correct approach was to consider whether there was any Loss in connection with any Claim ‘arising out of, based upon or attributable to’ insolvency. It argued that a requisite insolvency connection with bringing the Claim or the nature of the Loss was sufficient, irrespective of whether the liability / cause of action depended on demonstrating insolvency.

The mining company (which would stand to benefit from a responsive D&O policy in respect of the claims against the directors) argued that the exclusion only applied if the merits of the claim itself or the ‘causal pathway’ for the loss claimed in the proceeding depended on demonstrating insolvency.

Decision

The Full Federal Court considered the terms Loss and Claim in the context of the exclusion and held that:

  • The definition of Loss incorporated the term Claim;
  • The definition of Claim was concerned with the occurrence of an event (i.e. a demand or civil proceeding), not the reasons why the event occurred.
  • To the extent that the definition of Claim referred to a demand or a proceeding it was not simply defined as the demand or proceeding as a whole, but referred to a demand or proceeding ‘for a specified act, error or omission’.

The key question was whether the subject matter of the Claim required an insolvency link, or whether by reason of the underlying circumstances that led to the claim, it could be said that the Claim ‘arises out of, is based upon or is attributable to’ the actual or alleged insolvency of the mining company.

The Court held that the definition of Claim and the insolvency exclusion were not concerned with the reasons why a Claim had been brought, but rather the alleged acts, errors or omissions and the subject matter of the Claim itself. As the mining company’s claims against the former directors did not contain allegations of insolvency, the insolvency exclusion did not apply.