CIMIC Iraq Bribery claims: insurers demonstrate prejudice caused by non-disclosure

By Gemma Dehn and Madelyne Inch

The New South Wales Supreme Court recently handed down the mammoth decision of CIMIC Group Limited v AIG Group Limited [2022] NSWSC 999, which spanned almost 700 paragraphs and cited over 100 cases.

The Court was asked to make determinations on multiple factual and legal issues. For the purposes of this article, we have focused on several of the key issues in the decision including:

• an Insured’s disclosure obligations under section 21 of the Insurance Contracts Act 1984 (Cth) (Act);
• the operation of the continuity of cover clause; and
• insurers’ right to remedy for non-disclosure under section 28(3) of the Act.

Section 21 of the Act deals with an insured’s disclosure obligations before entering into an insurance policy. In particular, an insured must disclose any matter they know, or could be expected to know, to be relevant to whether the insurer accepts the risk.

Section 28 of the Act deals with a ‘relevant failure’, which is defined in the Act to include a failure by an insured to comply with the duty of disclosure set out in section 21. Section 28(3) allows an insurer to reduce its liability in respect of a claim to reflect the prejudice suffered due to the non-disclosure.

At the times relevant to the underlying facts of this claim, the Insured, namely CIMIC, was known as Leighton Holdings Limited (LHL).

Background: the Iraq File Note

On 23 November 2010, LHL’s incoming CEO made a file note of a conversation he had with LHL’s then-COO that suggested LHL officers may have engaged in bribery of, or made improper payments to, foreign officials to secure construction contracts for LHL in Iraq (Iraq File Note).

On 30 June 2011, seven months after the Iraq File Note was drafted, LHL renewed its D&O policy. Neither the Iraq File Note nor the information contained therein were disclosed to insurers at renewal.

In November 2011, the Iraq File Note came to the attention of LHL’s external solicitors when they were conducting a document review for the purposes of responding to an unrelated ASIC investigation. Shortly after (and on advice from its solicitors), LHL sent a copy of the Iraq File Note to the Australian Federal Police (AFP).

It followed that in early 2012, the AFP charged certain LHL officers with foreign bribery and misleading LHL’s board. In February 2012, LHL issued a media release to the ASX about the alleged improper payments and the AFP investigation.

It was not until 23 February 2012 that LHL notified its D&O tower of insurers (2011 Insurers) for the 2011/2012 policy period (2011 Policy) of the Iraq File Note and the AFP referral, on the basis that they were ‘circumstances that may give rise to a claim’.

The ASX media release resulted in ASIC investigations, further AFP charges and, in October 2013 and April 2015, the commencement of two class actions.

The 2011 Insurers advanced some ‘Defence Costs’ and ‘Investigation Costs’ in relation to AFP and ASIC investigations of certain LHL officers but declined to indemnify LHL for ‘Defence Costs’ and ‘Loss’ arising from the two class actions (Class Action Costs), on the basis of non-disclosure. The Class Action Costs amounted to over $32 million.

Issues

Continuous cover

The Court found that LHL could and should have notified the Iraq File Note under its 2010 policy (ie at or around the time the Iraq File Note was made and when the conversations occurred surrounding the possibility of bribery). However, the Court concluded that the claim was captured under the 2011 Policy because of the extension provided in the continuity of cover clause. The continuity of cover clause provided as follows:

5.3 Notwithstanding Exclusion 3.2 (Prior Claims and Circumstances), cover is provided under this policy for any Claim, or circumstance, which could or should have been notified under any earlier policy, provided always:

(i) the Claim or circumstance, could and should have been notified after the Continuity Date; and

(ii) the Claim shall be dealt with in accordance with all the terms, conditions, exclusions and limitations of the policy under which the Claim, or circumstance, could and should have been notified. 

The Court then considered the operation of the promise for cover under cl. 5.3(ii).

The 2011 Insurers contended cl. 5.3(ii) meant cover was only provided (if other defences did not apply; more on that below) for losses caught by cl. 5.3 up to 2010 Policy limit and that limit had already been eroded. Insurers’ argued cl. 5.3(ii) required the claim be dealt with in accordance with the ‘limitations’ of the 2010 policy and the classic ‘limitation’ in any insurance policy is the Limit of Liability.

The 2011 Insurers also made the salient point that a continuity of cover clause should not advantage an insured by essentially providing them with a new Limit of Liability. The 2011 Insurers submitted that allowing this would encourage an insured to exhaust an earlier limit, and then late notify under a later policy to effectively obtain the benefit of a further limit.

Interestingly. the Court disagreed and said that the effect of cl. 5.3 was that the claim (if covered) would be paid under the 2011 Policy (and erode the 2011 Policy Limit of Liability), but subject to the 2010 policy terms, which including the specified quantum of the Limit of Liability. The Court provided a number of bases for its conclusion, including that:

1. the purpose of the continuous cover clause is to provide cover for claims that might have been made earlier, but were not. The Court said that the policyholder pays a premium based on the insurer’s assessment of the risk that some claims may be made, in effect, out of time.
2. there was no mechanism in the 2011 Policy for the 2010 Insurers to notify the 2011 Insurers of payments they had made under the 2010 policy that would reduce or erode the Limit of Liability. According to the court, this tended against a construction applying the remaining (if any) 2010 Limit of Liability.

As to whether an insured could intentionally omit to notify an earlier year’s insurer in order to obtain the benefit of a new Limit of Liability, the Court considered that insurers are protected by the prohibitions on fraudulent failures to disclose and/or the duty of utmost good faith.

Non-disclosure

The next point was whether the 2011 Insurers were entitled to rely on clause 7.1 of the 2011 Policy to reduce their exposure, in respect of the Class Action Costs, to nil. Clause 7.1 provided:

This policy is not avoidable or rescindable in whole or in part and the Insurers shall have no other remedy with respect to pre-inception misrepresentation or pre-inception non-disclosure by any Insured in connection with this policy, except with respect of Insurance Cover 1.2 (‘Company Securities’).

If the Insurer has a right to reduce its liability under Section 28(3) of the [Act] for any fraudulent misrepresentation or fraudulent non-disclosure of a matter or fact established by final adjudication of a judicial or arbitral tribunal, or any formal written admission by or on behalf of any Insured, the Insurer will only exercise such right against that Insured.

(our emphasis)

LHL submitted that the second paragraph of cl 7.1 operated to limit the 2011 Insurers’ rights (in any scenario) to situations that were fraudulent, ie insurers could not reduce their liability to pay the Class Action Costs because the non-disclosure of the Iraq File Note was not fraudulent.

The 2011 Insurers argued that the second paragraph of clause 7.1 did not operate to reduce the scope of the first paragraph but was a standalone provision. Importantly, in order to obtain a remedy for prejudice established by non-disclosure, the non-disclosure under section 28(3) of the Act does not need to be fraudulent – fraud gives rise to the additional right of voiding the policy.

The Court agreed with the 2011 Insurers that they were entitled to reduce their exposure. The Court stated that the first paragraph of cl 7.1 deals with non-fraudulent conduct where all rights of remedy were excluded by Insurers (including those available under section 28(3) of the Act), except in respect of class actions. Meanwhile the second paragraph allowed the 2011 Insurers to reduce their liability for all types of claims where there is fraud.

Should the Iraq File Note have been disclosed?

Having found that the 2011 Insurers did not waive remedies for non-fraudulent non-disclosure, the Court then considered whether LHL did, in fact, fail to comply with its disclosure obligations under section 21 of the Act in respect of the Iraq File Note.

The Court concluded that the information in the Iraq File Note should have been disclosed to the 2011 Insurers pre-inception because:

….a hypothetical reasonable person in the position of [LHL] would have considered that the allegation by the relevant COO of an agreement to pay (and the further opportunity to agree to pay) a nominated subcontractor at above market price, so that Leighton Offshore could ‘win’ the contract for the Iraq work, was a matter that ought to have been disclosed to the Insurers pre-inception of the 2011 cover, as those facts, if true, could clearly give rise to losses that would be covered by the 2011 Policy.

The Court further expanded that there should have been a disclosure because a ‘directing mind’ of LHL knew that the statements proposing improper payments could have serious consequences for LHL and:

1. it was objectively reasonable that matters in the Iraq File Note, if true, were serious and could lead to ‘loss’ as defined by the 2011 Policy;
2. the statements made were by the COO responsible for the contracts in question and were ‘far removed from a mere rumour by a third party, without first-hand knowledge’; and
3. one of the COOs of LHL actually considered the seriousness of what was communicated (and recorded in the Iraq File Note) about possible bribery and knew that if it were true, it could lead to claims against LHL.

Misrepresentation

It is also worth noting that, along with failing to disclose the Iraq File Note, the Court also found that LHL made an ‘actionable misrepresentation’ to the 2011 Insurers in its 27 May 2011 proposal, for cover in the 2011/2012 policy period, by declaring that LHL had made enquiries of all appropriate staff and was not aware of any facts which might give rise to a claim against any its directors or officers had made a misrepresentation.

Prejudice due to non-disclosure/misrepresentation?

The 2011 Insurers gave evidence that, had they been notified of the information concerning the Iraq File Note, they would not have offered the 2011 Policy on the same terms or without including specific exclusions for losses attributable to the Iraq File Note. The 2011 Insurers further relied on what they did, in fact, do after LHL notified the circumstances of the Iraq File Note, which included incorporating a Bribery Exclusion and/or a specific matter exclusion.

The Court accepted the 2011 Insurers’ evidence and found that LHL had a duty to disclose the Iraq File Note pre-inception. As a result of LHL’s failure to disclose the Iraq File Note, the Court agreed that the 2011 Insurers had a complete defence under section 28(3) of the Act and their liability was reduced to nil.

Conclusion

In summary, the Court found:

1. The continuity of cover clause applied such that, the claim (if covered) would be paid under the 2011 Policy and erode the 2011 Policy, but in accordance with the terms and quantum of the specified Limit of Liability of the 2010 Policy. In other words, the claim could be met by the 2011 Policy, even though the 2010 Policy Limit had been eroded by prior claims.
2. The 2011 Insurers were entitled to rely on the pre-inception non-fraudulent, non-disclosure/misrepresentation in relation to the Class Action Costs to reduce their liability to nil.

The key takeaways

1. For insureds, it is a reminder of the importance of timely notification of circumstances and ensuring that their senior officers are appropriately educated about what information needs to be disclosed or notified and the consequences of failing to do so.
2. For insurers:
   • in order to avoid a result that an insured can erode a previous year’s policy limit, late notify circumstances in a subsequent policy period, and utilise the new year policy limit in relation to the late notification- insurers should check that any existing continuity clauses are drafted explicitly and specifically enough to achieve this result.
     While the Court suggested there remain other protections for insurers to prevent the insured benefitting from two limits, including the duty of utmost good faith and disclosure obligations, pursuing these avenues might be unsatisfactory to insurers because the standard of proof is higher and proving such breaches is likely to be difficult and costly.
   • it is well known that proving prejudice for breach of policy terms is notoriously difficult. However, this case provides guidance on what is a circumstance and what is needed to evidence and demonstrate prejudice. Key in this case to demonstrating the prejudice was the availability of underwriting records to support what actions the 2011 Insurers would have taken had proper disclosure been provided. This provides a useful reminder that having underwriting guidelines and a written evidence trail of underwriting processes and decisions, can be an important ingredient needed to demonstrate prejudice where non-disclosure has occurred.