Australian Property Custodian Holdings Limited (Holdings) was the trustee of the Prime Retirement and Aged Care Property Trust, which owned retirement villages.

The trust collapsed in 2011, taking $550 million of investors and triggering legal action over wrongful managerial acts in 2006, 2007 and 2008. Holdings held an investment management insurance policy with AIG. The limit of liability under the policy was $5 million, with a separate excess or additional limit of a further $1 million for each non-executive director.

Claims for defence costs by all directors had exhausted the $5 million limit of indemnity and one of the directors, Kim Jaques, sought indemnity to continue to fund his own defence costs. AIG declined to extend that cover to him, asserting that he was not a non-executive director, so Jaques sought a declaration from the court that he was entitled to that cover.

The decision

Perhaps surprisingly, there are very few circumstances where the distinction between an executive and a non-executive director has any legal consequence. The distinction has not been given content by the legislature or by the courts: the Corporations Act 2001 does not contain a definition of either, or any list of criteria that would aid in identifying whether a particular director was one or the other.

It is in the interests of both to make sure that the policy wording makes it clear which individuals are entitled to access the additional cover.

As the parties agreed, at law, the essential characteristic of an executive director is his or her discharge, usually as an employee, of executive functions in the management and administration of the company. The critical aspect of any enquiry into whether a director is an executive or a non-executive director is whether the company approved the assumption by the director, for the purposes of the policy, of the powers of an executive director, or whether there is some evidence of the delegation of executive function to that director.

Jaques had joined the trust as a non-executive director in 2001. In 2007, Holdings appointed him an executive director. This was among the evidence that AIG put forward in its argument. However, both the Supreme Court of Victoria and the Court of Appeal reject the characterisation of Jaques as an executive director.

The court found that any inferences to be drawn from circumstances where it appeared that Jaques was performing executive functions on behalf of Holdings were outweighed by more compelling evidence, namely, that in order to maintain its tax-exempt status, the business of Holdings had to be structured such that Jaques was not performing any executive function in the management of Holdings.

The impact on brokers

Many directors’ and officers’ liability insurance policies provide extra limit protection for non-executive directors, giving them access to additional cover in the event that the main policy limit is exhausted. This is an important benefit for those individuals.

However, as AIG v Jaques shows, it is in the interests of both insurers and insureds to make sure that the relevant policy wording makes it clear which individuals are entitled to access the additional cover.

The case demonstrates that to determine whether a particular director is an executive or a non-executive director is not as simple or straight-forward as it might at first seem. There were a number of objective factors which led AIG to the view that Jaques was not acting as a non-executive director. Jaques himself clearly had been confused as to which he was.

It is in the interests of both insurers and insureds to avoid any uncertainty as to which individuals will be entitled to access the additional cover for non-executive directors. One way to do this might be to name the non-executive directors in a schedule to the policy.

Kathryn Rigney is a Special Counsel in the insurance team at CBP Lawyers.