The role of D&O cover 

Directors' and officers' liability insurance (D&O insurance) is designed to protect directors, officers or the company itself from financial loss arising from claims made against individuals in connection with their corporate responsibilities. These policies typically cover legal defence costs, settlements and court-awarded damages arising from alleged misconduct such as breaches of duty, mismanagement or regulatory violations.

As part of the inception, or renewal, process for D&O insurance, insurers require insureds to complete detailed questionnaires pertaining to claims histories and risk profiles. Directors signing these proposals are expected to disclose any known facts, circumstances or conduct that could reasonably give rise to a claim. Failure to do so can result in denial of coverage, even if the policy has already been issued.

Recent Federal Court decisions, including Carter v Chubb Insurance Australia Ltd [2024] FCA 1312 , illustrate the ongoing challenges directors face in navigating disclosure obligations. In that case, Chubb successfully defended a $4.5 million claim after the Court found that a former CEO had failed to disclose knowledge of alleged bribery involving company dealings with key clients. The case highlights a recurring issue: determining what constitutes "actual knowledge" that must be disclosed, particularly when directors may be aware of concerning conduct but uncertain about its legal implications or likelihood of generating claims.

Disclosure duties under section 21 of the Insurance Contracts Act 

Section 21(1) of the Insurance Contracts Act 1984 (Cth) (ICA) requires an insured to disclose to the insurer, before entering into a contract of insurance, every matter that is known to the insured, being a matter that:

(a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b) a reasonable person in the circumstances could be expected to know to be a matter so relevant. 

Australian courts have consistently interpreted "known to the insured"  according to its ordinary English meaning, establishing clear boundaries around what constitutes disclosable knowledge. The judicial approach emphasises several key principles:

• The term “known” in the phrase "every matter that is known to the insured" carries its ordinary English meaning.
• "Knows" means considerably more than belief or suspicion, or even strong suspicion.
• Constructive knowledge (what a person ought to have known) does not satisfy the requirement, only actual knowledge does.

The disclosure duty extends beyond mere facts to include opinions genuinely held by the insured, as established in Prepaid Services Pty Ltd v Atradius Credit Insurance NV. 

In practice, this means directors must consider not only objective facts but also their subjective assessments and concerns about potential risks. 

Carter v Chubb

The Carter v Chubb case remains a practical example of how these disclosure principles apply. When completing the renewal proposal, Mr Carter answered “no” to the following Facts and Circumstances Question:

Is the Company, or any director, officer or employee aware, after enquiry, of any fact, circumstance, act or omission which may give rise to a claim that may be covered under a Directors & Officers Liability Insurance policy?”     

The Federal Court found Mr Carter's response to be false and fraudulent. Justice Halley held that Mr Carter possessed actual knowledge of dishonest and fraudulent conduct within the company and was either aware of his disclosure obligations or recklessly indifferent to them. His seniority, involvement in transactions and attendance at governance training reinforced this finding.

A key allegation involved Mr Carter authorising a $145,000 payment to purchase a Mercedes vehicle for a client. The Court considered it implausible that he would not have realised this could give rise to a claim or investigation. Consequently, the company (through Mr Carter) was held to have breached its duty of disclosure under section 21 of the ICA.

Mr Carter also admitted to not reading the insurance proposal and acknowledgment carefully, relying on others to complete the documents, and failing to make necessary inquiries that would have revealed the illicit activities. The Court did not accept these as reasonable excuses for failing to disclose known matters that would have been relevant to Chubb's decision to accept the risk. 

This reflects a broader judicial expectation that senior executives cannot delegate their disclosure responsibilities or claim ignorance of fundamental insurance obligations. The case demonstrates that Courts will examine not just what directors knew, but also what reasonable inquiries they should have made given their position and responsibilities.

Consequences of misrepresentation and non-disclosure 

Section 28 of the ICA sets out the remedies available to an insurer when an insured fails to comply with their duty of disclosure or makes a misrepresentation in relation to a contract of general insurance.

• Under section 28(2), if the non-disclosure or misrepresentation was fraudulent, the insurer is entitled to avoid the contract entirely.
• Under section 28(3), where the insurer is not entitled to avoid the contract, or chooses not to do so, it may reduce its liability for a claim to the amount that would place it in the position it would have been in had the failure not occurred.

In other words, fraudulent disclosures allow the insurer to void the policy entirely, while non-fraudulent disclosures may lead to a reduced payout that reflects what the insurer would have agreed to if full disclosure had been made.

When insurers successfully establish non-disclosure or misrepresentation under section 28(3), they may reduce their liability to nil if they can demonstrate through counterfactual underwriting evidence that the policy would not have been issued had proper disclosure been made. This principle applies regardless of the specific circumstances of each case, requiring insurers to prove what their underwriting decision would have been with full knowledge of the undisclosed matters. This was the case in Carter v Chubb, where the Court accepted the insurer's evidence that proper disclosure would have prevented policy renewal. Courts will scrutinise this evidence carefully, as it determines whether insureds retain any coverage under their policies.

The financial consequences of non-disclosure can be severe. In Carter v Chubb, the director not only lost coverage for approximately $4.5 million for defence costs but was also required to repay $723,005.12 previously advanced under the policy. 

Key takeaways for directors, officers and insured companies 

In the context of D&O policy renewals, directors and officers must ensure that responses to insurer questionnaires are truthful and complete. Vague, careless or overly narrow answers can have serious consequences, including the denial of coverage. 

Importantly, the duty of disclosure under section 21 of the ICA requires insureds to disclose actual knowledge of facts or circumstances that may give rise to a claim. This includes opinions genuinely held by the insured, such as concerns or assessments that a reasonable person would recognise as relevant. However, the duty does not extend to what someone ought to have known, which is considered constructive knowledge, nor does it include mere suspicion.

Effective disclosure practices require directors to maintain ongoing awareness of potential risks throughout the policy period, not merely at renewal time. This includes establishing systematic processes to identify and evaluate matters such as regulatory investigations, litigation trends, internal audit findings and emerging risks that could reasonably give rise to claims under D&O policies.

Cases like Carter v Chubb serve as a timely reminder that the integrity of insurance contracts depends on full and frank disclosure. While the legal duties are clear, applying them in practice can be complex, particularly when internal concerns or sensitive matters are involved. Our team regularly assists directors, officers and insureds in navigating these obligations, reviewing disclosure documents and responding to insurer queries. Early legal advice can make a critical difference in securing coverage and avoiding costly disputes.