Whether an insured had misrepresented and/or failed to disclose to an insurer that its professional services encompassed directors and officers services.
- Non-Disclosure and misrepresentations by insureds
- Consideration of sections 21 and 26 of the Insurance Contracts Act 1984 (Cth)
This proceeding arose as a result of the insolvency of a corporation, Akron Roads Pty Ltd (in liquidation) (Akron). Crewe Sharp Pty Ltd (Crewe Sharp) provided management consultancy services to Akron. It also provided the services of Mr Crewe to act as a director of Akron. While Mr Crewe was a director of Akron, Akron incurred debts while insolvent. The liquidators of Akron commenced proceedings against the directors of Akron, including Mr Crewe, and Crewe Sharp for damages for failing to prevent Akron incurring debts while insolvent. The professional indemnity insurer of Mr Crewe and Crewe Sharp, CGU Insurance Limited (CGU), denied indemnity for the liquidators’ claim. Accordingly, the liquidators also sought a declaration that CGU was liable to indemnify Mr Crewe and Crewe Sharp under the policy.
While a number of issues relating to the interpretation of the policy were in issue at trial, this case note focuses on whether CGU could avoid its liability to indemnify on the basis that Mr Crewe/Crewe Sharp failed to disclose that its management consultancy services included directorship services, and that it misrepresented that its management consultancy services did not extend to providing directorship services.
Whether there had been a non-disclosure or misrepresentation by Crewe Sharp centred upon the manner in which Crewe Sharp’s Proposal Form had been completed, and the further information provided in relation to the Proposal Form.
Crewe Sharp’s Proposal Form indicated that the insured’s professional services included accounting, clerical and secretarial, nurses, engineers and draft persons, and “others”. Relevantly, CGU made a request for further information about the professional services comprising the category “others”. Crewe Sharp’s broker responded via email that Crewe Sharp’s professional services comprised “strategic management consulting centred around HR services”.
The court found that a reasonable person would have known of the onerous duties imposed on directors and officers, and that directors and officers insurance is usually the subject of a separate policy. On this basis, the court found that Crewe Sharp ought to have known that the offering of director and officer services was a matter relevant to the decision of CGU to accept the risk, and if so, on what terms. His Honour also found that a reasonable person would have known that Crewe Sharp had failed to disclose that its professional services comprised director and officer services. The court determined that the belief of Crewe Sharp that CGU knew it provided director and officer services was insufficient to avoid the obligation to disclose under s 21 of the Insurance Contracts Act 1984 (Cth) (ICA).
The court also found that CGU was entitled to rely upon the response from Crewe Sharp’s broker as being a full and comprehensive response to CGU’s request for further details as to what services where encompassed within the category of “others”.
Accordingly, the court held that Crewe Sharp had failed to satisfy its duty of disclosure in s 21 of the ICA, and had engaged in misrepresentation pursuant to s 26 of the ICA. CGU was therefore entitled to reduce its liability exposure to nil on the basis that it would never have issued the policy if it had been informed that Crewe Sharp’s business activities included director and officer services.
Implications for you
This decision is an important reminder for insurers, in considering policy exposure to a claim, to carefully consider the characterisation of an insured’s professional services to ensure that there has been no misrepresentation or non-disclosure by the insured about the professional services it offers.
For brokers and insureds, it highlights the importance of ensuring that the terminology used to describe the insured’s professional services is clear and comprehensive to avoid a denial of indemnity on the basis that a misrepresentation or non-disclosure about the insured’s professional services has been made.