In recent years, there have been a handful of decisions in which litigants and potential plaintiffs have sought access to inspect the directors’ and officers’ liability insurance (D&O) policy of another party. They have arisen primarily in the context of shareholder class actions. This appears to be a growing area of litigation and cases on access to insurance policies are likely to be of interest, particularly to directors and their D&O insurers.
The most recent of these decisions — London City Equities Ltd v Penrice Soda Holdings Ltd [2011] FCA 674 (London City Equities) — is another example of access being granted to a potential plaintiff pursuant to an application under section 247A of the Corporations Act 2001 (Cth).
This article reviews the recent decisions and considers whether London City Equities advances the jurisprudence on access to a D&O policy.
The facts in London City Equities
London City Equities Ltd (LCE) is a shareholder of Penrice Soda Holdings Ltd (Penrice). LCE was concerned about three matters regarding Penrice:
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possible non-disclosure or misleading disclosure of certain financial information of Penrice;
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whether certain dividends were paid other than from profits; and
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whether Penrice had funded two directors in the defence of their positions on the board of Penrice.
LCE brought an application under section 247A of the Corporations Act to inspect certain categories of the books of Penrice. LCE wanted to inspect the books to investigate and decide whether LCE had a claim against the directors of Penrice. It also wanted to use the books to bring a shareholder derivative action against directors. LCE believed that the matters it raised may be contraventions of either or both of section 674 or section 1041H of the Corporations Act.
LCE sought inspection of a range of categories of books. These included “all documents recording, referring to or relating to Penrice’s Directors and Officers insurance policies” for a stipulated period. The evidence presented by LCE explained that the company wanted to know whether the directors were insured, and the amount and extent of any insurance. This information would help LCE decide whether, if it brought legal proceedings and was successful, the directors would be in a position to pay any judgment granted against them.
The arguments for and against access to the D&O policies
In favour of LCE were decisions in Re Style Ltd (2009) 255 ALR 63; [2009] FCA 314 (Style) [1] and Snelgrove v Great Southern Managers Australia Ltd (in liq) (receiver and manager appointed) [2010] WASC 51 (Snelgrove).
Both Style and Snelgrove involved applications under section 247A of the Corporations Act in which the courts ordered access to D&O policies.
In Style, Goldberg J had granted access in the exercise of his Honour’s discretion.
In Snelgrove, Le Miere J also exercised a discretion to allow access but went further and explained that it was appropriate to do so having regard to “the approach to litigation enshrined in the case management rules of [the Supreme Court of WA] and other superior courts in Australia is to avoid waste of time and costs and to ensure as far as possible proportionate and economical litigation”. [2]
Penrice argued that any order to allow inspection by LCE should be limited to documents to enable LCE to decide if it had a cause of action against the directors. The question as to the directors’ ability to pay a judgment was not relevant to this decision. The D&O policies may only indicate whether an identified cause of action was practically or commercially worth pursuing. Finally, Penrice argued that Style and Snelgrove did not pay any or sufficient regard to certain competing considerations. It identified considerations of confidentiality and a possible “magnet” effect of allowing a plaintiff access to insurance policies. [3]
The decision of the Federal Court
The court in London City Equities was not prepared to make an order in the broad terms sought by LCE, but nevertheless granted LCE access to certain D&O policies. Robertson J was not persuaded that the decisions in Style and Snelgrove were clearly wrong. His Honour followed those decisions as a matter of precedent.
The implications of this decision need to be considered in the context of the developments in this area of the law.
Developments in the law on access to D&O policies
Historically courts have not required a defendant to give a claimant or potential claimant access to the defendant’s liability insurance policies. These are generally seen as not relevant to any issue in litigation, but indicative only of the defendant’s ability to satisfy a judgment. There have been exceptions to this usual approach. For example, liquidators have generally been considered to be in a unique situation compared to that of an ordinary litigant, and there are instances of courts permitting a liquidator to seek information about liability insurance that may be available should the liquidator issue proceedings.
In the Style case, Goldberg J disagreed with the applicant’s argument that a shareholder seeking information under section 247A of the Corporations Act with a view to assessing whether to bring proceedings in the name of the company against directors, is in a position that is analogous to a liquidator. [4] The applicant did not seek to rely by analogy on the relevant rules of court that deal with preliminary discovery, accepting (as the court noted) that access to insurance policies is usually denied under those rules (unless relevant to investigating the identity of potential parties to an action). [5] The court nevertheless granted access to the insurance policies in the exercise of its discretion without elaborating on the factors that influenced that exercise of its discretion.
In the Snelgrove case, unlike in Style, the plaintiffs simultaneously applied for (and were granted) leave to commence proceedings against the defendant. This meant that the purpose for which the application for inspection was brought was not to enable the plaintiffs to determine whether they had grounds for bringing a derivative action against the directors or a personal action against the company. It was to assist the plaintiffs to consider the economic viability of pursuing their proposed action against the company. This was found to be a proper purpose under section 247A of the Corporations Act. [6] The court then exercised its discretion to allow the access to the insurance, primarily to give the plaintiffs sufficient knowledge before deciding whether to proceed with litigation and therefore to prevent the resources of the parties and the public being wasted.
In Lehman Brothers Australia Ltd v Wingecarribee Shire Council (2009) 72 ACSR 251; [2009] FCAFC 63 (Lehman Bros), the applicants sought production of Lehman’s professional insurance policy and D&O policy under section 23 of the Federal Court of Australia Act 1976 (Cth). Essentially, the applicants considered that the policies were relevant to their decision as to whether to vote in favour of a deed of company arrangement (DOCA) proposed to the creditors of Lehman by the administrator. The DOCA would have the effect of extinguishing the applicants’ rights of action. The appeal court overturned a decision to grant access to the insurance policies. The power given to the court under section 23 arises from the existence of an apprehended or antecedent abuse of process. [7] The court’s view was that the proposed adoption of the DOCA was not an abuse of process which justified granting access to the insurance policies.
In Kirby v Centro Properties Ltd (Centro), the applicants sought production of insurance policies in anticipation of a mediation of a shareholder class action dispute. They considered an inspection of the documents to be necessary for their effective participation in the mediation. The applicants’ submissions engaged or invoked rules of court regarding discovery of documents relevant to proceedings and the principles underlying case management. Ryan J acknowledged that courts have traditionally been reluctant to accord any relevance to the possession of insurance cover in determining the existence or measure of liability against which the policy indemnifies a defendant. [8] His Honour pointed out that “the existence of policies of insurance held by a party or the details of such policies will not normally be relevant to the proof of any cause of action pleaded against that party”. [9] The court refused access to the policies, finding that the mediation could proceed without the applicants having knowledge of any insurance cover and that the policies were not related to matters in question in the proceedings as required by the rules of court dealing with discovery.
The implications of the decision in London City Equities
The Style, Centro, Lehman Bros and Snelgrove cases appear to indicate that litigants or potential plaintiffs may have difficulty obtaining access to insurance policies unless the application is brought by a shareholder under section 247A of the Corporations Act. In that situation, it is only the Snelgrove decision that provides specific guidance as to the basis on which a court will exercise its discretion and grant access. That decision suggests that access will be allowed to be consistent with the courts’ approach to case management principles intended to avoid litigation that would be a waste of time and cost. The London City Equities case does not expand on that position or provide any alternative factors that would be relevant to the exercise of a court’s discretion.
In short, it could be said that London City Equities does not advance the current position on access to D&O policies and is not new law. It is simply another example of access to insurance policies being allowed in the context of a section 247A application.
Companies facing potential shareholder class actions, and the directors of those companies, will need to be mindful of the risk that details of their insurance will be revealed to shareholders who are contemplating an action against the company or a derivative action against the directors. If access is granted and there appears to be insurance to cover potential claims, there is arguably a higher risk that the shareholders will proceed with litigation (than if access were refused).
D&O insurers generally require their insureds to keep the details of a D&O policy confidential unless disclosure is compelled by a court. If access to D&O policies is allowed, and this leads to more claims being made against insured directors (than if the nature and extent of the D&O cover was kept confidential), then this may serve to increase the exposure of D&O insurers.
It remains to be seen whether the High Court will confirm the approach taken in Style, Snelgrove and London City Equities as establishing a further exception to the traditional rule that insurance policies are generally not relevant and should not be disclosed to litigants.
This article was first published in the Australian Insurance Law Bulletin, Volume 27 No 1, October 2011.
[1] See the discussion on this case in the article: “Shareholders get to inspect directors’ and officers’ liability insurance policies” (2009) 24(9) ILB p 132. [back]
[2] [68]. [back]
[3] 03]. [back]
[4] [75]. [back]
[5] [78]. [back]
[6] [67]. [back]
[7] [43]. [back]
[8] Kirby v Centro Properties Ltd [2009] FCA 495 at [10]. [back]
[9] at [13]. [back]