Separation of Questions in Directors and Officers Liability Insurance Case

The court granted the claimants' motion for the separate determination of questions regarding the interpretation of an insurance policy, specifically concerning the applicability of exclusion clauses under certain conditions.

New South Wales Supreme Court

CITATION : [NAME] v [COMPANY] [NAME] v [COMPANY] [NAME] v [COMPANY] [2002] NSWSC 1091 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50141/01; 50096/02; 50150/02 HEARING DATE(S) : 14 November 2002 JUDGMENT DATE : 19 November 2002

[NAME] (Pltf) PARTIES : [NAME] (Pltf) [NAME] (Pltf) [COMPANY] (Def) JUDGMENT OF : [NAME] J

D L Williams ([NAME]) COUNSEL : [redacted] [NAME]/A W Street SC (Def) [NAME] ([NAME]) SOLICITORS : [redacted] [NAME] (Def) CATCHWORDS : INSURANCE - motion for separate questions - whether questions hypothetical - principles applicable when all relevant facts are pleaded CASES CITED : [NAME] v [COMPANY] (1999) 161 ALR 399 DECISION : See para 11

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY [NAME] J

TUESDAY, 19 NOVEMBER 2002

50141/01 [NAME] v [COMPANY] 50096/02 [NAME] v [COMPANY] 50150/02 [NAME] v [COMPANY]

JUDGMENT 1 HIS HONOUR: The plaintiffs in each of these proceedings have moved for the separate determination of the following questions: "Whether, on the true construction of directors and officers liability insurance Policy No 01 DO 0298798 ("the Policy"), issued by the defendant: [redacted] (b) the defendant itself is entitled to seek a judgment, order or other final adjudication adverse to a director or officer and, thereby, exclude liability for a claim under clause 3.1 of the Policy in the same proceedings in which an insured makes a claim for indemnity against the defendant; (c) exclusion clause 3.1 of the Policy operates to exclude liability on the part of the defendant to pay claims by an insured for the indemnity under clauses 2.1 and 2.6 of the Policy." 2 The defendant resists the application. 3 The plaintiffs, who are former directors of [COMPANY], which is in liquidation, have brought proceedings against [COMPANY] claiming indemnity for the costs of defending themselves in proceedings brought against each of them by the Australian Securities and Investment Commission ([NAME]). I have previously considered an application by the plaintiffs to strike out certain paragraphs of the defence. That application raised substantially the same issues as would be raised by the present questions if a separate trial is ordered. In relation to the strike out application I determined that the position of the defendant was reasonably arguable and accordingly, declined to strike out the relevant parts of the defence. 4 The pleaded defence raises two major questions in each proceedings. The first relates to whether, by reason of any non-disclosure or misrepresentation, the insurer is entitled to avoid the policy. The second is whether the defendant can rely on the exclusion under cl 3.1 of the policy in answer to a claim for indemnity in circumstances where there has been no relevant judgment or finding by any court or other body. Clause 3.1 of the policy is in the following terms: "This Policy does not provide an indemnity against any Claim made against any Director or Officer: 3.1 Dishonesty & Fraud brought about by, contributed to by or which involves: (1) the dishonest, fraudulent or malicious act or omission or other act or omission committed with criminal intent of such Director or Officer; (2) such Director or Officer having improperly benefited in fact from securities transactions as a result of information that was not available to other sellers and/or purchasers of such securities; or (3) such Director or Officer having gained in fact any personal advantage to which he/she was not legally entitled. However, this exclusion shall only apply to the extent that the subject conduct has been established by a judgment or other final adjudication adverse to the Director or Officer." 5 The defendant raises, in relation to the exclusion provided by cl 3.1, significant matters relating to the conduct of each plaintiff. It is pleaded that information was withheld from the Board of [COMPANY] in circumstances which involved dishonesty and fraud. It is also alleged that false information was provided to the Board and various breaches of statutory provisions are pleaded. If this aspect of the matter is litigated the factual enquiry will be extensive and must involve considerable court hearing time and expense to the parties. For this reason, it is submitted by the plaintiffs that the questions which have been framed carry a real prospect of determining a significant part of the litigation, without entering upon an investigation of the facts, with significant savings in court time and expense. 6 The defendant submits that an order for the separate trial of the proposed questions should not be made. It is submitted that the questions are hypothetical and can only be determined after an investigation of the relevant facts.

Accordingly, it is submitted that to order separate questions would be contrary to the principles provided by the High Court in [NAME] v [COMPANY] (1999) 161 ALR 399. 7 For their part the plaintiffs accept that the questions which they seek to have separately determined should be decided upon the assumption that the matters pleaded against each plaintiff are true.

Accordingly, the procedure which is suggested resembles a demurrer. The facts upon which the questions would be argued are those identified in the defence and for the purpose of the suggested questions it may be assumed "that the pleadings exhaust the universe of relevant factual material." 8 In my opinion the plaintiffs' submissions should be accepted. The proposed separate questions are not hypothetical in the sense considered in [NAME]. In this case they must be determined upon the assumption that the defendant can prove the pleaded facts. 9 That being so the determination of the separate questions does provide the real possibility of avoiding the necessity of litigating in these proceedings the substantial factual allegations which have been made with consequential savings in time and costs. 10 Each of the plaintiffs face proceedings brought by [NAME] in which some of the matters pleaded by the defendant in the present proceedings, in relation to the conduct of the plaintiffs, will be agitated by [NAME]. The determination of the separate questions contemplated by the plaintiffs may have the further benefit of avoiding the necessity for this Court to determine the relevant factual matters in both the [NAME] proceedings and the current proceedings with the consequential risk of contradictory findings. 11 Accordingly, in my opinion it is appropriate, in each of the proceedings, to make order one in the form of the motion brought by [NAME]. I will, before making any order, hear the parties as to whether the questions should be further refined having regard to these reasons. Costs may be argued. **********

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