Confidentiality clauses in insurance policies

Confidentiality Clauses appear in many various insurance policies. We commonly deal with their application in relation to directors’ and officers’ liability. Increasingly however they are becoming more common applied in professional indemnity wordings.

The intention of these clauses is to ensure that the terms and condition of cover remain confidential to the parties to the insurance contract: the insurer and the insured.  You should not as a rule of thumb disclose your policy to any third party, if you do you may prejudice your entitlement to indemnity.

Standard confidentiality clause

A typical directors’ and officers’ liability confidentiality clause will read: The existence and terms of this policy will be confidential as between the insured and [insurer] and will not be published, disclosed or otherwise communicated except where:

  1. the law requires disclosure in the financial statements or annual reports of payment by the policyholder of a premium in respect of a contract insuring persons against a liability;

  2. we consent in writing to disclosure of the existence and/or terms of this policy; or

  3. the insured is compelled by order of a court to do so.
The clause imposes an obligation on the policyholders not to disclose particulars of the policy. This includes limits of indemnity, premium and retentions.
Why is disclosure prohibited?

Many disputes are commenced and resolved on the basis of the availability of insurance. These disputes are resolved prior to final determination by a Court (via mediation or otherwise informally). Each parties’ assessment of liability, quantum of a claim and the perception of risk versus reward of pursuing the claim are all crucial factors. However, the level of insurance (or indemnity available thereunder) held by an insured is irrelevant to the assessment of the quantum and liability issues.

Accordingly, it is in the insured’s and insurer’s interests that details of insurance policy limits are not disclosed to a third-party. Any such disclosure is likely to distort (and artificially inflate) a third party’s perception of its possible return from the litigation.

A confidentiality clause attempts to ensure that insurance details are protected by an express obligation of confidence and to discourage insured’s from disclosing such details to third parties who may take advantage of this knowledge. For example, if a claimant is aware that the organisation is insured for high limits of indemnity, the claimant may be encouraged to file for an unreasonable demand instead of assessing the claim for its true value. However, it should not be assumed that the Court’s will not allow access to such policy information in a particular case.

In some cases, parties have been successful in gaining access to a D&O policy.[1] In other cases, access has been refused.[2]

In a recent decision of the Federal Court of Australia, Derrington J refused to allow shareholders in a class action to inspect the company’s insurance policies and correspondence with its insurers. In particular in relation to correspondence between an insurer and insured, his Honour reasoned that an insured is required to make full disclosure to their insurer and that the obligations of good faith in this context “involve heightened duties of frankness and confidentiality”. His Honour considered that allowing disclosure to third parties of correspondence between insured and insurer would “severely and detrimentally” affect the parties to the policy from corresponding between each other in accordance with their duties.  An exceptional case might have to be advanced before the discretion might be exercised to permit the inspection of correspondence between insured and insurer.[3]

The key point is that a company’s directors and officers should not release or disclose their D&O policy information unless required to by the law (usually by order of the Court) or, the insurer consents in writing to such disclosure. If an insured breaches the confidentiality provisions the insurers may have the right to null and void the policy and in some cases could seek damages for breach of contract.

[1] See e.g. Merim Pty Ltd v Style Ltd [2009] FCA 314 and Snelgrove v Great Southern Managers Australia Ltd  (in liq) (receiver and manager appointed) [2010] WASC 51

[2] See e.g. Lehman Brothers Australia Ltd v Wingecarribee Shire Council [2009] FCAFC 63 and Kirby v Centro  Properties Ltd [2009] FCA 695

[3] Ingram as trustee for the Ingram Superannuation Fund v Ardent Leisure Limited [2020] FCA 1302 (11 September 2020) at [98] – [99]

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