Background
Petrofac Ltd’s directors and officers were covered by a D&O insurance programme. The claimant insurers provided the second excess layer, covering £45 million above £30 million. Former Petrofac officers Marwan Chedid and George Salibi, insureds under the policy, had pleaded not guilty to Bribery Act 2010 charges and were awaiting a lengthy criminal trial. Their defence costs had been paid under the primary and first excess policies, but those policies’ limits were close to exhaustion.
The insurers purported to avoid the second excess policy as against the defendants for alleged fraudulent misrepresentation and fraudulent non-disclosure, relying materially on allegations that remained unproved. Because the defendants said they could not fund their criminal defences themselves, the Commercial Court expedited three preliminary issues concerning avoidance under clause 8.2, the insurability of defence costs, and the insurers’ obligation to advance those costs under clause 6.3.
The Court’s Holding
Mr Justice Jacobs held that clause 8.2 prevented the insurers from avoiding the defendants’ interests in the policy for alleged fraudulent misrepresentation or non-disclosure unless the fraud had first been established by a final decision of a court, tribunal or regulator, or by a formal written admission. The clause displaced the insurers’ ordinary ability to treat avoidance as an immediate self-help remedy. It was not contrary to public policy because it regulated the period between allegation and proof without protecting an insured from the ultimate consequences of fraud if proved.
The court also held that defence costs incurred in answering unproved bribery charges were insurable. Public policy did not prevent an agreement to fund the defence of criminal allegations, including bribery allegations. Because the insurers failed on both preliminary issues, they remained obliged under clause 6.3 to advance the defendants’ defence costs on an incurred basis, within 21 days after receiving sufficiently detailed invoices. If fraud or disqualifying conduct were later established, the insurers could seek recovery of amounts advanced.
Key Takeaways
- A D&O policy may validly postpone avoidance for fraudulent placement conduct until the alleged fraud is established through the contractually specified process.
- Defence costs for unproved criminal allegations, including bribery charges, are not uninsurable merely because the alleged conduct is serious.
- An insurer required to advance costs pending adjudication may later recover them if fraud is established, the conduct exclusion applies, or the policy is avoided from inception.
Why It Matters
The decision confirms that “final adjudication” and non-avoidance provisions can preserve defence-cost funding while disputed fraud allegations remain unresolved. Insurers cannot nullify that protection through their unilateral assessment of the allegations when the policy expressly requires independent establishment or a written admission.
For directors and officers facing proceedings they may be unable to fund personally, the ruling protects access to the defence-cost coverage purchased for precisely that risk, while preserving insurers’ rights if the relevant misconduct is ultimately proved.