Does fraud probe revoke my insurance policy? Financial Times (Money)

Published on 30 Jan 2010 under category: cubism

By Peter Mellett, Consultant at Cubism Law

As published in The Financial Times 30 January 2010

I run a successful company based in London that publishes business-related magazines and business education titles. In October last year, the Serious Fraud Office announced that the company was being investigated.

My two co-directors are being accused of fraud with regard to orders from suppliers. So my insurance company will not permit me to claim for associated legal costs on the directors and officers (D&O) policy that the company took out, as the insurers say the company has committed a criminal act.

However there is no implication that I have done anything wrong. What action can I take to get the insurers to cover my legal costs under the D&O policy?

The answer is that the devil is in the detail of the policy. Although you are now reliant on the wording of the D&O policy your company purchased, it cannot be emphasised enough that the wordings of these policies vary considerably and a specialist insurance broker should always be consulted before deciding which policy is most appropriate for your business.

All D&O policies exclude claims arising from dishonest or fraudulent acts and illegal personal profit. What you need to examine is whether there is a severability clause in this policy.

This will provide that, from an insured’s point of view, the dishonest conduct of a co-insured (i.e. the company or your fellow directors) should not have an impact oni your right to call for defence costs coverage.

Defending D&O claims is a notoriously expensive exercise. If there is a severability clause that you suspect the insurers may try to argue that you were dishonest, look at the defence costs coverage clause. Some clauses say that insurers are liable to pay your defence costs until the allegations of dishonesty have been adjudicated upon – probably up to point of a trial.

If you are unfortunate, you may have the in fact version which allows the insurer to refuse to pay defence costs if it can bring evidence of dishonesty on your part.

Peter Mellett is an insurance specialist consultant at Cubism Law.