Banking on some cover: Royal Commission exclusions on D&O liability policies

So you're a senior executive in the financial services sector.  Your company's Directors and Officers Liability policy is up for renewal and the insurance broker informs you that, owing to hardened market conditions, poor industry claims experience, adverse reputational risks or whatever, the only renewal terms that can be secured involve an absolute exclusion of any future claim arising out of, or in any way connected with, any matters falling within the terms of reference of the Royal Commission into the Banking, Superannuation and Financial Services Industry. 

Not to worry though, says the broker in what is meant to be a reassuring tone, the underwriters just want to ring-fence their liabilities.  All you have to do is tell the insurer(s) of your existing policy, before it expires, about any fact, matter, circumstance or whatever which might conceivably give rise to a claim against you, now or at any time in the future. 

The known unknowns meet the exclusion clause

The problem is that after consulting your colleagues, your complaints register and your conscience, you honestly can't think of a single matter to notify.  You are not conscious of any misconduct on the part of your company or any of its representatives, but unless and until some dissatisfied client makes a complaint, you have no way of knowing from whom and on what basis a future claim might emerge.  It is a pretty safe bet though that if one does, it will involve matters within the Royal Commission's terms of reference and will therefore fall , within the exclusion.

What to do?  The Royal Commission of itself is hardly a notifiable circumstance, or is it?  If the insurer's objective is merely to flush out any potential claim circumstances which the Royal Commission might uncover, and contain them to the expiring policy period, they should not in principle object to a notification in the same terms as the exclusion.  Claims-made policies already exclude any matters known to the insured at renewal, whether or not they are disclosed, but an exclusion which removes cover for anything that comes to light at a Royal Commission, or even anything that falls within its terms of reference, goes considerably further.

Since the insurer cannot predict all of the forms which future complaints or claims against the insured may take, its preferred position is likely to be an exclusion drafted by reference to the (very wide) terms of reference of the Royal Commission itself.  That exclusion will apply to your matters whether or not you knew about and could notify them at the time of policy renewal.  Your insurance broker may, or may not, be able to negotiate a narrower version.

Making a circumstance notification do the hard work

The solution to the problem would appear to be a circumstance notification that operates, effectively, back to back with the exclusion, so that any subsequent claim which is caught by the exclusion from the new policy will, ipso facto, also be encompassed by the circumstance notification under the expired one.  This avoids the problem of the insured falling between two stools, so to speak.  If the objective is really just to ring-fence Royal Commission liabilities to a single policy year, there should be no objection on the part of insurers to this approach.  Is it possible, however, to contrive such an effective notification with a sufficient degree of precision to engage section 40(3) of the Insurance Contracts Act?

The answer, in my opinion, is that it is.  While the insurance industry routinely purports to reject so-called blanket circumstance notifications, the current state of the law is that whether a circumstance notification has attached cover for a subsequent claim to the policy under which it was given can only be determined at the time the claim is actually made, when it can be seen whether, and to what extent, it has arisen out of the matters previously notified. 

The cases have made clear that an insured who is faced with a public inquiry revealing that systemic misconduct has occurred in their industry, and concludes that it would be unrealistic to assume that they would never be accused of such behaviour or of complicity in it, can give notice to its insurer of:

• the situation that has arisen;
• the type of impugned conduct and causes of action to which it may give rise; and
• the extent to which the inquiry itself has increased the likelihood of such claims being brought, irrespective of their merit.

Any purported rejection of such a notification by the insurer at the time it is given is irrelevant to the question whether, if and when a claim is eventually brought against the insured, it arose out of the matters notified.

The prospects of a seamless, back to back transition of cover will be enhanced the closer the ambit of matters notified matches the terms of the incoming policy exclusion.  There's a further advantage if the renewal is with the same insurer; if   the exclusion applies to a claim under the new policy, there will likely be an issue estoppel against that insurer with respect to the attachment of cover under the expired one.

So if you have a claims-made insurance policy…

The moral of the story, as always with claims-made insurance policies, is notify early and notify often.  If you have something concrete to notify then obviously do so, but if you don't, and you are confronted with a swingeing Royal Commission exclusion amounting effectively to a retroactive date on your renewal policy, then meet it on its own terms with an equally broad circumstance notification.  You have nothing to lose and any purported rejection of it by the insurer will not change anything.