Woodford v AIG Europe Ltd & Anor

Under a claims-made directors’ and officers’ policy governed by German law, knowledge of a breach required positive knowledge of the relevant conduct and an actual conclusion that it was wrongful. Suspicion, ethical disapproval and investigation were insufficient. The policyholder had no such knowledge before the specified date.

The insurer also failed to establish a deliberate breach of the information obligation or legally relevant detriment. Defence costs were recoverable under the policy’s contractual test of reasonableness, having regard to complexity and significance, without importing CPR proportionality rules.

Michael Woodford and Paul Hillman sought indemnity under a German-law D&O policy issued by AIG Europe Limited for defending proceedings brought by KeyMed (Medical and Industrial Equipment) Limited concerning an executive pension scheme.

AIG alleged that the policyholder knew of the relevant breaches before 1 August 2015 and had deliberately failed to provide requested information. Mr Hillman also brought a contingent claim against KeyMed concerning an alleged failure to maintain D&O insurance. The principal issues were knowledge, non-disclosure and recoverable defence costs.

1. The “free from” wording in Special Condition 5 formed part of the primary risk description, not a secondary risk exclusion. The claimants therefore bore the primary burden of proving absence of the relevant knowledge, subject to a staged evidential process.
2. Knowledge required both positive knowledge of the relevant conduct and an actual conclusion that it was wrongful. Ethical or corporate-governance concerns, suspicion and an ongoing investigation did not suffice. On the evidence, Mr Kaufmann, Mr Williams and Mr Takeuchi had not reached that conclusion before 1 August 2015.
3. The policyholder’s reliance on privilege and request for additional time did not amount to a deliberate refusal or unreasonable delay under clause 5.2. In any event, AIG failed to prove legally relevant detriment.
4. The policy indemnified reasonable defence costs. The contractual reference to complexity and significance did not import CPR standard-basis or proportionality rules. The costs claimed were reasonable given the value, complexity and reputational significance of the underlying litigation.
5. The claimants were entitled to an indemnity for their defence costs. The contingent claim against KeyMed did not require determination.