Secret Commissions held in trust for the principal: Does it affect D&O insurance? - DAC Beachcroft

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Secret Commissions held in trust for the principal: Does it affect D&O insurance?

Published On: 2 September 2014

The recent decision in FHR European Ventures LLP v Cedar Capital Partners LLP [2014] has brought clarity to the long debate of what interest and/or rights a principal has over the proceeds of secret commissions, profits or bribes obtained by its agent. In this case, the defendant acted as the claimant's agent in connection with the acquisition of a hotel in Monaco. Unbeknown to the Claimant, the Defendant had previously entered into a unique brokerage agreement with the vendor for €10 million upon completion of the sale. 

The Claimant successfully recovered this sum from the Defendant on the grounds of breach of fiduciary duty for the making of the secret profit. The Supreme Court held that the secret commissions were held on trust for the principal who had a proprietary interest in the amount paid and consequently, priority to recover such amount should the defendant become insolvent.

The implication for the D&O insurance market is very significant: Is there an insured liability? Insurance policies exclude deliberate misconduct on the grounds that the insured cannot benefit from his/her own wrongdoing.

Most importantly, account of profits does not depend on proof that the company has suffered any loss; it is penalised because of the impropriety of concealing the true facts. Consequently, D&O carriers would not be contractually bound to indemnify the insured director 'wrongdoer' in scenarios like the one described above, because insurance cannot provide a benefit which the law forbids and indemnify directors for monies they were not entitled to in the first place.

Whilst this clarification is a positive development for D&O insurers, they may still be liable for the defence costs incurred, especially if they are to be advanced until final adjudication. Even where the directors successfully defend such a claim, pressure will be placed on insurers to meet the costs on an on-going basis, unless, of course, any exclusion is triggered at an earlier point in time. For example, the insured v insured exclusion may come into play, albeit this type of exclusion is being removed from the majority of policies due to tremendous market competition.