Directors often take out what is called directors and officers insurance to cover their legal costs if they are sued in their capacity as directors. A recent case involving the directors of the failed telco One.Tel raise some concerns about this type of insurance. The policy in the One Tel case stated that the legal costs would however not be paid by the insurer if the directors had been guilty of fraud and dishonesty.

The policy said that ‘this exclusion shall only apply to the extent that the subject conduct has been established by a judgement or other final adjudication adverse to the directors’.

There had not been any such judgement against the directors however the insurance company refused to pay the directors legal costs. The directors sued the insurance company but the court of appeal held that the insurer could refuse to pay the legal costs even though there had not been a judgement if it was acting ‘on reasonable grounds’ and believed that fraud and dishonesty had occurred.

The problem is that the decision may set a precedent that could be followed by insurers in the case of ‘ordinary’ people. Can the insurer avoid paying out by simply saying it believes there may have been fraud and dishonesty?

Care needs to be taken to read the terms of any insurance policy to make sure that the coverage you are being promised is in fact what you want it to be. If you are still in doubt you should discuss this with the insurance agent/broker and possibly have your lawyer look at the policy before entering into it.