In brief
- In a significant decision for holders of D&O insurance, in Liberty Managing Agency Ltd & Ors v Chedid & Anr [2026] EWHC 2354 (Comm) the English Commercial Court rejected arguments that an insurer could avoid providing cover for defence costs under a D&O policy before fraud was established.
- A non-avoidance clause in the policy meant that insurers remained obliged to advance defence costs until the fraud was either admitted, or established by a final decision of a court, tribunal or regulator.
- Such a clause was not contrary to public policy – the principle that "fraud unravels all" applies to proven fraud but does not prevent parties from agreeing how unproven allegations of fraud should affect their contractual relationship in the interim.
- However, given the importance of the issue, permission to appeal has been granted.
Background
In 2024 two former officers of the energy services company Petrofac were charged by the Serious Fraud Office with various bribery offences. Their defence costs were initially paid by insurers of Petrofac's primary D&O policy and a first excess policy, each of which had a £15 million limit of indemnity. However, shortly before trial it became clear that the indemnity available under those policies would be exhausted, and that further funding of defence costs would need to be provided by the insurers of a second excess layer in Petrofac's programme.
Unfortunately, insurers of the second excess layer purported to avoid the policy on the basis of allegations of fraudulent misrepresentation and fraudulent non-disclosure relating to the alleged bribery. The defendants, who disputed the as yet unproven allegations, contended that this imperilled their ability to defend themselves and so the court was asked to determine the issue on an expedited basis.
The issues
Construction of the policy
Avoidance of an insurance policy by an insurer for fraudulent misrepresentation or fraudulent non-disclosure is, at common law, a "self-help" remedy – the insurer is not required to obtain a court decision before declining to perform its obligations under the policy, but it runs the risk that it will ultimately be held liable to perform.
However, the defendants contended that the position was altered by the presence of a non-avoidance clause incorporated into the second excess policy which provided that:
The Insurer shall not avoid this policy … on the grounds of misrepresentation or non-disclosure, except with respect to:
- an Insured, who has fraudulently misrepresented or fraudulently non-disclosed material information prior to the conclusion of this contract …
where such fraudulent conduct is established by a final decision of a court, tribunal or regulator or by a formal written admission of the Insured.
As a matter of construction, Mr Justice Jacobs accepted that this meant that, where there was no admission, the insurer could only avoid for fraudulent misrepresentation or non-disclosure once there was a final decision by a court, tribunal or regulator. That was the clear and only realistic meaning of the words used in the clause, and was consistent with other provisions of the policy, particularly an exclusion for loss arising out of a deliberately dishonest or deliberately fraudulent act by the insured.
Noting that such clauses are a common feature of D&O policies, the judge further observed that this construction made good commercial sense, ensuring that directors and officers would not be deprived of defence costs until an objective determination as to their conduct has been reached.
Public policy
Insurers went on to contend that, in any event, since, as a matter of public policy, parties cannot agree provisions which exclude the consequences of their own fraudulent wrongdoing, the non-avoidance clause could not have the effect for which the defendants contended.
While Mr Justice Jacobs accepted the established principle that "fraud unravels all", in his view the relevant authorities only addressed the consequences of contractual clauses in the context of proven fraud. He did not consider that there was an English case which decided that public policy prevents the parties from reaching agreement as to how their contract is to operate at a time when there is an unproven allegation of fraud, which is to be determined in the future.
Here the parties had not sought to alter any of the consequences of fraud, if ultimately proved, but rather substituted the self-help aspect of avoidance with a requirement that an objective decision must be reached first. If fraudulent misrepresentation or non-disclosure was proved, insurers would still be able to avoid the policy and recover any defence costs already advanced. In the judge's view there was not a public policy which should prevent them from reaching such a commercially sensible, "pay now, sue later" agreement.
In reaching this decision, the judge noted that there is no public policy reason which precludes an agreement to indemnify against the costs of meeting allegations of criminal wrongdoing, including alleged bribery.
Mr Justice Jacobs therefore concluded that the insurers remained obliged to advance the defendants' defence costs.
Conclusion
A successful outcome for insurers in this case would have sent shockwaves through the D&O market. As the judge noted, individual directors frequently lack the means to properly defend themselves against serious criminal charges. The availability of cover for defence costs thus lies at the heart of D&O cover, and is one of the reasons why it is so valued by policyholders. Indeed, the recent introduction of the "failure to prevent fraud" offence under the Economic Crime and Corporate Transparency Act 2023 has only bolstered interest in D&O cover.
Mr Justice Jacobs' decision, confirming that pursuant to a non-avoidance clause of the type seen here, insurers will be obliged to advance cover for defence costs prior to any admission or final decision establishing the fraudulent conduct, is therefore welcome news for the time being. However, recognising the importance of the issues, permission to appeal was granted - this may not be the end of the story quite yet.
In the meantime, the decision is an important reminder to policyholders to review cover at both the primary and excess layers, to ensure that it provides adequate protection.