The Federal Court ruled that a former CEO and director of Orix was not entitled to indemnity under a director and officers liability policy in circumstances where he failed to disclose a course of conduct involving payment of bribes and illegal inducements when signing a renewal proposal for the policy.
In issue
- The central issue before the Federal Court was whether a former CEO and director of Orix was entitled to indemnity under a directors and officers liability insurance policy for defence costs incurred in legal proceedings, in circumstances where he failed to disclose conduct involving payment of bribes and illegal inducements to procurement managers of customers of Orix.
The background
The proceedings related to claims for indemnity made by John Carter (Carter) under a directors and officers liability policy that Orix Australia Corporation Limited (Orix) had obtained from Chubb Insurance Australia Limited (Chubb), for the period of 31 December 2014 to 31 December 2015 (Policy). Carter was the Managing Director and Chief Executive Officer of Orix – and was an 'insured' within the meaning of the Policy. Carter sought indemnity with respect to defence costs incurred by him in defending criminal charges brought against him on 2 April 2015 relating to alleged bribes to clients Coca-Cola Amatil and GrainCorp (Criminal Proceedings), and civil proceedings brought against him by Orix (Civil Proceedings).
Chubb denied liability on the basis that Carter was engaged in, and aware of, alleged fraudulent misrepresentations and fraudulent non-disclosures at the time he signed a renewal proposal for Orix’s directors on 30 October 2014. Chubb also cross-claimed against Carter seeking recovery of the money it had paid for the defence costs incurred in the Criminal Proceedings, prior to advising Carter that his claims for indemnity had been denied.
As for the Criminal Proceedings, Carter was charged on 2 April 2015 for four counts of corruptly receiving or soliciting a benefit pursuant to s 249B(1) of the Crimes Act 1900 (NSW), and one count of knowingly dealing with proceeds of crime under s 193B(1) (Charges). He pursued indemnity under cl 1.1 of the Policy and cl 2.3 which related to ‘Emergency Defence Costs’. Chubb initially accepted the defence costs were payable, however reserved its rights under the Policy pending further information. Chubb reimbursed Carter $657,277.38 for costs incurred in defending the Criminal Proceedings.
Upon review of the material served by the NSW Police in the Criminal Proceedings, however, Chubb formed the view that Carter was engaged in, and aware of, fraudulent non-disclosure by Orix to Chubb at the time the Policy was entered into. On 13 April 2017, Chubb notified Carter of its decision to suspend the advancement of defence costs and sought repayment of the sums advanced from Carter.
Carter initiated proceedings against Chubb on 7 October 2020 claiming he was entitled to an amount totaling $3,230,369.95. Chubb contended that Carter was aware of, but did not disclose in response to a question in the renewal form on circumstances that could give rise to a claim (Fact and Circumstances Question), a course of conduct that involved, in broad terms:
- the payment of bribes and provision of illegal inducements to Bryan Pereira (Mr Pereira), the procurement manager of Coca-Cola Amatil Ltd (CCA), a fleet customer of Orix, and
- two transactions which amounted to the payment of bribes and provision of illegal inducements to Tony Chidiac, the procurement manager for GrainCorp Ltd, also a fleet customer of Orix.
Separately, on 12 June 2020, Orix commenced the Civil Proceedings against Carter for allegations including contraventions of the Corporations Act 2001. Carter filed a cross-claim against Orix seeking indemnity under the Policy for costs incurred in defending the Civil Proceedings.
The decision at trial
The Federal Court (The Court) was required to consider a staggering fifty-five issues, although Justice John Halley stated that the most prominent issue was the extent of Carter’s knowledge when he signed the renewal proposal prior to entering into the Policy, and his belief of the likelihood of a future claim being pursued against him.
The Court considered several events which clearly demonstrated Carter’s involvement in and knowledge of the course of conduct involving payment of bribes and illegal inducements to other entities. For instance, the Court heard evidence relating to payments to CCA’s procurement manager Bryan Pereira (Mr Pereira). These payments were made for the purpose of providing Mr Pereira personal benefits, for the purchase of a vehicle for personal use. The Court found that, from the nature of payments made in response to Mr Pereira’s requests, Carter knew those payments had not been authorized by CCA.
The Court considered in some detail whether fraudulent representations were made to Chubb. The Court specifically noted that the Insurance Contacts Act 1984 (Cth) does not define fraud but accepted the common law definition that fraud is established when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, or careless as to whether it be true or false. The Facts and Circumstances Question in the policy proposal required consideration of the meaning of 'may give rise to a claim'. The Court observed that phrase suggested something between a 'probability' in the sense of 'more likely than not' and a 'possibility' in the sense of 'a chance, however, likely'. The language of 'a definite risk', a 'real possibility', 'on the cards', and the notion of the 'springing to mind' were useful guides. It was relevant that by 2014, Carter had been a director of a significant Australian corporation for approximately 13 years and its Managing Director for the previous 10 years and had attended at least two corporate governance courses directed at directors’ duties. Further, the internal compliance documents of Orix that were current during Carter’s term as Managing Director of Orix included the Compliance Manual, a gifts and gratuities policy and the Code of Ethics, all of which Carter conceded he was aware. The Court concluded that Carter knew the relevant matters at the time that he signed the proposal on 30 October 2014 containing the declaration and the negative answer to the Facts and Circumstances Question.
Section 21 of the Insurance Contracts Act 1984 (Cth) applied. This section requires that there be knowledge of a matter before there is a duty to disclose it. The meaning of 'known to the insured' for the purposes of s 21(1) of the Insurance Contracts Act 1984 is well settled: 'knows' means considerably more than believes or suspects, or even strongly suspects; and constructive knowledge is insufficient; actual knowledge is required. The Court had no hesitation in accepting that Carter knew (by actual knowledge or reckless indifference) that the facts not disclosed were relevant to the decision of Chubb whether to accept the risk and if so on what terms. Given the extent of Carter’s experience, training and his knowledge of the compliance manuals of Orix it was implausible that Carter did not appreciate the relevance of the non-disclosed matters.
The Court ultimately determined that Carter fraudulently failed to disclose the alleged bribes to Chubb when signing the Policy – finding that Carter possessed knowledge of the payment of bribes and illegal inducement at the time he provided the relevant answers to Chubb’s Policy questions. Chubb was entitled to deny indemnity to Carter and to reduce its liability to nil under s 28(3) of the Insurance Contracts Act 1984 (Cth). It was also entitled to recover the money already paid to Carter.
Implications for you
This case serves as a timely reminder of the importance of full and frank disclosure when applying for a contract of insurance.
The case otherwise provides a usual summary for practitioners on how a court may tackle whether a person fraudulently breached their duty of disclosure and on the meaning of phrase 'may give rise to a claim.'
