The High Court has clarified the position in relation to insurers who decline to provide funding to defend allegations of dishonest or fraudulent behaviour, saying such a clause needs to be clearly expressed to take effect.
The High Court case related to Daniel Wilkie, who was an officer of FAI Insurance Limited and had professional indemnity insurance for up to $20 million.
The Australian Securities and Investments Commission initiated criminal proceeding against Mr Wilkie for offences under the Corporations Act.
Mr Wilkie notified his insurer (GIO) and sought to obtain advance payment of defence costs.
GIO denied indemnity based on a dishonesty exclusion clause, although Mr Wilkie had not admitted to the charges or had the charges heard in court.
The High Court held GIO was not entitled to refuse advance defence costs since the dishonesty GIO was relying on had not yet been proven.
Freehills partner Justin Manolini said the outcome of the Wilkie case was useful for directors in that it clarified the situation that most directors believe is common policy.
“The High Court said that if insurers want to give themselves a unilateral right to refuse to advance defence costs in criminal proceedings, they have to do so in a clear and explicit way,” he said.
“The case turns very heavily on the specific wording in that policy, and policy wording does vary from director to director, but the message is that directors need to look at their policy wordings to ensure their right to claim advance defence costs.
“Ultimately, if a director is charged with fraud, an insurer can’t refuse to pay advance defence costs unless the policy clearly states that.”
Mr Manolini said a failure to properly consider the potential ramification of different policy wordings and strategies may leave the insured without a remedy.
