A 2011 Australian court decision in BOS International v Babcock ruled that an undertaking in a commercial agreement to provide information about a company's assets and financial position overrides a confidentiality clause in a directors & officers insurance policy.
BOS International ("BOSI"), a facility agent for a syndicate of lenders, entered into a syndicated facility agreement with Babcock for the loan of $3 billion. Babcock undertook to procure insurance against the risks in relation to its business and assets. It also agreed to provide lenders with "other information … relating to its assets… and financial position".
Like many D & O policies, the policy taken by Babcock contained a confidentiality clause providing that:
"The insured shall make all reasonable efforts not to disclose the existence of this policy to any person except to professional advisers or as required by law or court order and shall only state within the company's annual report that the company has agreed, or otherwise, to pay a premium for this policy but shall not publish the nature of the liability covered by this policy, the name of the insurer, the limit of liability or the premium paid for this policy".
BOSI wanted to see the policy to find out its value and the limit of indemnity. It also wanted to see the likelihood of success of a claim against insurers should Babcock fail to meet its obligations in terms of the loan agreement. It argued that the D & O policy was an "asset" and the information sought related to Babcock's financial position.
Babcock refused to provide the policy on the basis that to do so would be a breach of its confidential obligations under the policy. It contended that D & O policies were, in any event, not "assets" as contemplated in the loan agreement.
The court held that the confidentiality clause was not absolute. The clause allowed disclosure "imposed by law" and the court found a contractual obligation to be an obligation imposed by law. The court ruled that the D & O contracts of insurance were assets of Babcock and the request for the D & O policies was a request for information relating to those assets and the financial position of Babcock. In any event, the policy did not prescribe any consequence for breaching the confidentiality clause.
The court pointed out that there was in consequence no breach of the confidentiality clause in the policy.
How would this situation be approached in South Africa? A South African court is likely to give a similar interpretation to a similar confidentiality clause.
An insurance contract is a contract like any other contract. Confidentiality can be imposed but the clause would have to state so expressly and confirm that it was not subject to an independent obligation to disclose assumed by the insured elsewhere. The consequence of a breach of the confidentiality clause must also be specified in the contract if it is to have any force.
This creates difficulties for D & O insureds especially in situations like Babcock where the company raises substantial financing. In the Babcock case, the courts decision was influenced by the amount of the loan and the fact that Babcock's parent company had gone into liquidation.
The court found it "…unclear why it could not have been assumed that a borrower who was borrowing a very large amount of money would not seek the agreement of its insurers to the clause before entering into the Agreement (or advising the insurer if the policy was affected after the Agreement was entered into)". Companies entering into large loan agreements should bear this in mind and consult with their brokers and insurers when agreeing to disclosure obligations in a loan transaction.
And any non-disclosure clause should be subject to the person receiving the information being bound to agree to a similar confidentiality provision.