Commercial opportunity enough for personal advantage exclusion in D&O policy to apply

By Bridget Wall and Simon Quenby

Hakea Holdings Pty Ltd v Neon Underwriting Limited for and on behalf of the Underwriting Members of Lloyds Syndicate 2468 [2023] FCAFC 34

The Full Court of the Federal Court has found that a commercial opportunity will fall within the meaning of ‘personal profit or advantage’ in an unfair advantage exclusion contained in a directors and officers liability insurance policy (D&O policy). The Court has further affirmed that in order for an insuring clause to be satisfied, there is no requirement that the insured reads, absorbs or comprehends a written notice said to constitute a ‘Claim’ – the insured must merely have come into the possession of the written claim.

The Court’s decision was an appeal from the judgment of Justice Yates in Hakea Holdings Pty Ltd v McGrath (No 2) [2022] FCA 995. The appeal was heard by Justices Colvin, Button and Jackman. Justices Colvin and Button dealt with the ‘Claim’ issue and Justice Jackman dealt with the exclusion.


Mr McGrath was a director of both the appellant, Hakea Holdings Pty Ltd (Hakea) and Denham Constructions Pty Ltd (Denham). Hakea held a D&O policy with Neon Underwriting Limited for and on behalf of the Underwriting Members of Lloyds Syndicate 2468 (Neon).

Mr McGrath was sole director, shareholder, secretary and general manager of Denham. Evidence was given that Mr McGrath used the funds of Denham for his own personal expenses. Denham entered into a contract with Hakea to design a residential aged care facility in NSW (Project). Under the agreement, Hakea had rights to ensure works were completed by specified dates and the ability to terminate the agreement in the event of insolvency.

Denham experienced various delays in completing its works. Unbeknownst to Hakea, Denham was subject to a payment arrangement with the ATO, upon which it defaulted. At the time the works were to be completed, Denham was in severe financial distress and had received multiple statutory demands.

At the same time, Hakea became concerned regarding the progress of the Project. Various emails were exchanged with Mr McGrath (on behalf of Denham). Mr McGrath made no mention of Denham’s financial troubles, which were the cause of the delays in the works being completed. Mr McGrath rather made representations that the works would be completed pursuant to agreed timeframes. Denham’s liquidity problems were eventually disclosed to Hakea by employees of Denham and not by Mr McGrath. A show cause notice was issued by Hakea and Denham was ultimately wound up.

Decision at first instance

The primary decision concerned whether Mr McGrath breached his directors’ duties and also whether Neon was obliged to indemnify Hakea for Mr McGrath’s conduct.

Justice Yates found that Mr McGrath breached section 180(1) of the Corporations Act 2001 (Cth) (Corporations Act) by not disclosing that Denham was in financial distress. Justice Yates further found that, if the issues were disclosed, the contract would have been terminated at an earlier date and Hakea suffered loss and damage as a consequence of Mr McGrath’s conduct.

Justice Yates found that the advantage for the purpose of the exclusion was the contract remaining on foot, which led to the continuation of the revenue stream to which Mr McGrath had access.


There were two issues dealt with on appeal.

What constitutes ‘advantage’?

First, Hakea contended that Neon may not rely on an exclusion in the policy, which provided that Neon was not liable for losses arising from a director or officer ‘gaining any personal profit or advantage or receiving any remuneration to which he or she was not or is not legally entitled’.

The evidence in relation to the exclusion was not in dispute; Mr McGrath did not disclose the financial troubles of Denham as it would jeopardise the project and ultimately him. Notwithstanding this, Hakea argued that an ‘advantage’ must be a legal entitlement, such as a contractual right. Mr McGrath did not receive such an advantage for the two reasons outlined below.

  1. Denham was entitled to continuation of the contract under the terms of the contract until Hakea exercised its rights to terminate.
  2. Continuation of the contract was not an advantage to Mr McGrath as he was not a party to the contract.

In response, Neon argued that ‘any personal…advantage’ was broad and did not require the relevant advantage to be property or money. Rather, it may include a thing or situation.

Justice Jackman considered that the phrasing applied to any matter which makes the director or officer better off or improves their circumstances. Commercial opportunity is captured in the meaning of the phrase. Justice Jackman noted the evidence that Mr McGrath used the funds of Denham for his personal benefit. The Court found that the words of the exclusion did not require consideration of the continuation of the contract or the terms of the contract concerning termination. It is not directed to legal entitlements held by other parties.

Hakea further argued that the exclusion required a finding of fact that Mr McGrath gained an advantage ‘to which he or she was not or is not legally entitled’. Hakea argued that no such finding had been made. Neon submitted that this had been established by relying on section 182 of the Corporations Act, which relates to directors using a position to gain an unfair advantage or benefit. A finding was made by Justice Yates at first instance that Mr McGrath breached this provision.

Justice Jackman considered that there were various ways that it may be established that the advantage was one which Mr McGrath was not legally entitled, for the purposes of the exclusion. Justice Jackman accepted Neon’s argument and found that the breach of section 182 was sufficient for the purposes of establishing that the advantage was unlawful. Justice Jackman set out the means by which such an advantage may be recovered from Mr McGrath. Mr McGrath had the purpose of obtaining an improper advantage and clearly received such an advantage. The advantage received was the very purpose of the conduct, not some incidental benefit.

Justice Jackman considered whether it can be said that Mr McGrath used his position of director to gain the advantage, for the purposes of section 182. Hakea contended that this was not established as the words ‘use’ in section 182(1) require there to be a positive act. Justice Jackman noted that there was no reason to decide whether this involved acts and omissions, as Justice Yates had found that Mr McGrath’s conduct involved both positive acts and omissions.

Finally, Justice Jackman noted that even if a breach of section 182 was not established, the exclusion would apply due to a clear breach of section 180(1). Mr McGrath receiving the benefit of the continuation of the contract was the very advantage and object for which the wrongful act was committed. In that respect, this was also a director obtaining a personal advantage by breaching his duties as a director and gaining an unlawful advantage.

Justices Colvin and Button agreed with Justice Jackman, but noted that the appeal may be resolved by referring to the section 180 breach and that it was not necessary to consider section 182.

When is a claim ‘first made’?

The second issue in the appeal was whether a ‘Claim’ had been made within the ‘Period of Insurance’.

The policy required that a ‘Claim’ be ‘first made’ during the ‘Period of Insurance’. ‘Claim’ was defined as ‘a written notice received by a Director or Officer…’. Hakea had established the notification provision of the policy, which allowed a 30-day grace period for provision of the written notice to Neon.

Neon contended that the definition of ‘Claim’ was not satisfied as, while a written notice had been received by Mr McGrath in his email inbox, Mr McGrath did not comprehend or understand the meaning of the notice. The word ‘received’ in the definition required the insured (Mr McGrath) to have actual knowledge of the demand made.

Hakea’s position was that it was only necessary to show that the email was received into Mr McGrath’s email inbox. The written notice was a letter, which was sent by email. Mr McGrath gave evidence at the trial that he checked that inbox sporadically. No evidence was given that Mr McGrath did not receive the notice itself.

In the first instance, Justice Yates noted the evidence that Mr McGrath previously used the email inbox and found in favour of Hakea. Justice Yates found that the references to the policy being a ‘Claims made’ policy supported that nothing further than the actual coming into the possession of the written notice was required.

Colvin and Button JJ rejected Neon’s argument and adopted a common-sense approach. There was no requirement in the clause that Mr McGrath comprehend the written notice or understand its meaning. Justices Colvin and Button held that all that was required was that the communication be put into Mr McGrath’s possession – which had occurred. The Court considered that if Neon’s arguments were accepted it would be an uncommercial interpretation of the policy.


This case draws attention to the significance of the wording of the policy.

A broadly worded unfair advantage exclusion clause will mean that an insurer can deny cover in circumstances where the advantage received is a mere commercial opportunity. Further, insurers are unlikely to succeed in technical arguments concerning claim and notification clauses in circumstances where the intention of the policy is clear.


Bridget Wall

Bridget is a general insurance lawyer with a focus on professional indemnity, medical liability claims and indemnity disputes.

Simon Quenby

Simon is a skilled insurance lawyer with expertise in commercial disputes and specialising in professional indemnity matters.

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