The appeal decision of the Full Federal Court in AIG Australia Limited v Kaboko Mining Limited confirmed that an insolvency exclusion was not triggered where a cause of action by a company against its former directors did not contain allegations of insolvency, notwithstanding that the directors’ actions arguably led to the company’s insolvency.

Background

This week’s TGIF considers the decision of AIG Australia Limited v Kaboko Mining Limited [2019] FCAFC 96, in which the Full Federal Court found that an insolvency exclusion in a D&O policy did not apply to exclude claims brought against directors and officers of a company under external administration.

What happened?

The Federal Court of Australia in Kaboko Mining Limited v Van Heerden (No 3) [2018] FCA 2055 handed down a significant decision which clarified the operation of "insolvency exclusion" clauses in a D&O liability insurance policy. The issue arose after Administrators commenced proceedings against four former directors of the company, and the insurer relied on an insolvency exclusion to decline to indemnify the former directors in respect of the claims made in the proceedings.

The facts

The Kaboko judgment brings comfort to directors who hold D&O insurance policies, or those seeking to bring proceedings against directors of an insolvent company, provided the claim is not based in whole or in part on the company's insolvency.

In December 2018, NSW building certifier Watson Oldco entered into voluntary administration. The AFR reports that administrators have attributed the move largely to the result of uninsured exposure to potential claims arising from buildings with combustible cladding. Although there were no known claims against Watson Oldco, it was reported that there was uninsured exposure which led to the decision to place the company into voluntary administration.

The decision in Kaboko Mining Limited v Van Heerden (No 3)1 highlights the importance of considering carefully both the pleaded causes of action, as well as the underlying facts of a claim, to determine whether it ‘arises out of, is based upon or attributable to’ a particular event or circumstance that could trigger an exclusion.

Background

We are frequently approached by architects looking to wind down their practices, because either (i) they want to retire, (ii) they want to close down because of economic uncertainty, or (iii) they simply do not want to carry on with their practice and they will gain little value in selling it. However, in winding down a practice, we recommend the following key issues are considered:

1. Your contractual and professional obligations as an architect to maintain professional indemnity insurance run-off cover; and

It has been a strange summer yet all too soon the nation is deflating paddling pools, spending the national debt of a small country in shoe shops and fervently sewing on name tapes as September and a new academic and then legal year approach. We hope many of you have managed some sort of break from home working / living at work despite all the difficulties with travel this summer. We were particularly tickled when one of our clients suggested setting an "out of spare room" autoreply on his email, rather than "out of the office".

Insurance covering the representations and warranties of a seller in a purchase agreement (RWI) has become relatively commonplace in non-distressed M&A transactions. Insurance covering other specific contingent risks associated with a transaction, such as environment liability or tax liability or benefits, is also available. Less commonly, but with increasing frequency, these transaction insurance policies are being marketed and sold in transactions arising in bankruptcy and insolvency transactions.

UPDATED 3 AUGUST 2020

Updates marked with *

Updated: Ireland, Israel

We take a look at some of the recent emergency legislation and measures implemented by various nations around the world in response to COVID-19. As this is a rapidly developing crisis, please ensure you keep a close eye on the Lexology Coronavirus hub page for the most up-to-date information.