(Article from Insurance Law Alert, September 2026)
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Holding
The English Commercial Court held that insurers could not avoid a D&O policy on the basis of alleged fraud in its placement. The policy required fraud to be established by a final court decision or formal written admission before avoidance was permitted; until then, the insurers were required to continue to advance defense costs. Liberty Managing Agency Ltd v Chedid [2026] EWHC 2354 (Comm).
Background
The insurers issued a D&O policy to Petrofac Ltd. The defendants—former Petrofac officers facing criminal bribery charges to which they had pleaded not guilty—were insureds under the policy. The insurers purported to avoid the policy based on alleged fraudulent misrepresentation and non-disclosure in its placement. Those allegations materially relied on the prosecution’s case in the pending criminal trial and had not yet been proved.
The key issue was whether the insurers could avoid the policy on the strength of the fraud allegations alone, or instead had to await a final determination of the fraud. The defendants argued that Clause 8.2 prevented avoidance until fraud was established. That clause provided that the insurer could not avoid the policy for misrepresentation or non-disclosure unless such fraudulent conduct “is established by a final decision of a court, tribunal or regulator or by a formal written admission of the Insured.” The insurers argued that the clause was no more than “surplusage” reflecting “the ordinary position that an insurer who avoids must ultimately, in the event of dispute, establish its case at trial.” The insurers further argued that Clause 8.2 was unenforceable because it would protect the insureds from “the consequences of their own fraudulent wrongdoing,” contrary to public policy and the principle that “fraud unravels all.”
Decision
The court held that the words “established by a final decision” in Clause 8.2 imposed a temporal requirement: the insurer could only avoid the policy once the fraudulent conduct had been established by a final decision of a court, tribunal or regulator or by a formal written admission. The court noted that this construction made “good commercial sense”—directors and officers would want their ongoing defense costs paid until there was an “objective resolution” of allegations that may otherwise permit avoidance of the policy, and D&O insurers would be willing to provide that protection to make their policies more attractive in a competitive market.
The court also rejected the argument that Clause 8.2 was contrary to public policy. The principle that parties should not benefit from their own willful wrongdoing applies to proven fraud. But there was no public policy bar to parties agreeing how unproven allegations of fraud would affect their contractual relationship. Clause 8.2 simply regulated the position while the alleged fraud remained unproven. If the insurers ultimately proved fraud in relation to the placement of the policy, the policy “will (in the usual way) be avoided ab initio, and any benefits received by Defendants (such as defense costs which have been advanced) will need to be returned.” Nor was there any public policy bar to an agreement to indemnify against the costs of defending allegations of criminal wrongdoing.
Comments
Beyond the policy wording, the court was unwilling to endorse a result that could deprive the insureds of the ability to defend themselves and increase the chances of their defense failing. The counterbalance, as the court noted, is that if fraud is ultimately established and the policy avoided, the insureds must repay the defense costs advanced.