Final Adjudication Wording Prevents Avoidance Pending Proof of Fraud

The recent English High Court decision in Liberty Managing Agency Ltd & Ors v Chedid & Anor [2026] EWHC 2354 (Comm) provides important guidance on the operation of final adjudication wording in D&O policies.

Reported decisions on these issues are relatively uncommon, particularly given that many coverage disputes of this nature are resolved in confidential arbitrations.

The decision confirms that final adjudication wording may, where clearly drafted, operate as a substantive restriction on an insurer's ability to avoid a policy for fraudulent misrepresentation or non-disclosure. Importantly, the Court reached that conclusion despite recognising the orthodox common law position that avoidance is ordinarily a self-help remedy exercisable without prior judicial determination. The significance of the policy’s non-avoidance clause was that it contained sufficiently clear wording to displace that position.

The judgment reinforces the distinction between alleged and established fraudulent conduct. The Court accepted the public policy principle that a party cannot be indemnified against the consequences of its own proven fraud or criminal conduct. However, it held that the relevant policy provisions regulated the parties' rights pending determination of disputed allegations and therefore did not offend public policy.

The judgment also confirms that defence costs incurred in responding to allegations of bribery and other serious criminal misconduct are not uninsurable as a matter of public policy. The Court emphasised the distinction between funding the defence of allegations and indemnifying the consequences of proven wrongdoing.

Interestingly, the judgment does not address the position once fraud or dishonest conduct has been established, nor does it suggest that insurers must necessarily await the outcome of the underlying proceedings before relying on avoidance rights or conduct exclusions. In the usual way, whether and when the relevant conduct has been "established" will depend on the wording of the particular policy and the contractual mechanism agreed by the parties.

An expedited appeal is due to be heard by the Court of Appeal and therefore this High Court decision is subject to that process.

The Dispute

The underlying proceedings concern two former Petrofac officers (the “defendants”) facing criminal charges under the Bribery Act 2010. Both have pleaded not guilty.

Following a claim being made under Petrofac's D&O programme, insurers subscribing to the second excess layer (the “Insurers”) alleged that, when the policy was placed, material information concerning the defendants' alleged involvement in the bribery had been fraudulently misrepresented and/or not disclosed. The Insurers contended that they were therefore entitled to immediately avoid the policy.

As the underlying layers of insurance approached exhaustion and substantial defence costs continued to be incurred, a dispute arose as to whether Insurers could avoid the policy and cease funding defence costs before the alleged fraud had been established.

Given the fast-approaching criminal trial in November 2026 and the potential implications for the defendants' ability to fund their defence, the High Court ordered an expedited hearing of the preliminary coverage issues.

Can insurers avoid the policy before fraud is established?

The principal issue concerned the operation of the policy's non-avoidance provision, clause 8.2. In broad terms, clause 8.2 removed the Insurers' ordinary right to avoid for misrepresentation or non-disclosure, save in cases involving fraudulent misrepresentation or fraudulent non-disclosure by specified individuals. Crucially, however, the clause went on to provide that the relevant fraudulent conduct must be "established by a final decision of a court, tribunal or regulator or by a formal written admission of the Insured".

Insurers argued that the requirement for fraud to be "established" simply reflected the ordinary burden resting on insurers to prove fraudulent misrepresentation or non-disclosure if avoidance were challenged. On that basis, they asserted their common law right of avoidance immediately.

The defendants argued that, on its natural wording, clause 8.2 postponed the Insurers' ability to avoid the policy unless and until the alleged fraud had been established by a final decision of a court, tribunal or regulator or by a formal written admission.

The Court accepted the defendants' construction.

Referring to Abram Steamship Co v Westville Shipping Co, the Court recognised that avoidance is ordinarily a “self-help” remedy which may be exercised without first obtaining a court order. However, whilst accepting that clear wording would be required to restrict that common law right, the Court concluded that clause 8.2 met that standard. On its proper construction, the clause displaced the ordinary position that avoidance may be exercised before any adjudication of the relevant fraud.

The Court held that, where there has been no written admission, the clause permitted avoidance only once there has been a final decision of a court, tribunal or regulator establishing the relevant fraud. The Court rejected the Insurers' submission that the words "established by" were merely declaratory of the ordinary burden of proof, holding that such a construction would deprive those words of meaningful effect.

In reaching that conclusion, the Court considered that the clause achieved an important and commercially sensible result. The Court found that directors and officers can reasonably expect defence costs protection to remain available whilst allegations remain unresolved, rather than being dependent upon an insurer's unilateral assessment of the facts. Equally, the Court considered it understandable why D&O insurers operating in a competitive market might agree to provide that protection.

The Court found further support for its interpretation in the structure of the policy as a whole. Clause 5.1 postponed the operation of the conduct exclusion until dishonest or fraudulent conduct had been established by final adjudication or written admission. In the Court’s view, clause 8.2 mirrored clause 5.1 by applying an "allegations now, consequences after adjudication" framework to allegations of fraudulent misrepresentation and non-disclosure at placement.

Was clause 8.2 enforceable as a matter of public policy?

Insurers argued that any interpretation preventing immediate avoidance would be contrary to public policy because parties cannot contract out of the consequences of fraud, relying on authorities including HIH Casualty & General Insurance Ltd v Chase Manhattan Bank and Pearson & Son Ltd v Dublin Corporation.

The Court rejected that submission.

Whilst the Court accepted the established principle that a party cannot be indemnified against the consequences of its own proven fraud, it held that clause 8.2 did not seek to protect proven fraud. Rather, it regulated the parties' rights during the period between allegation and proof.

That distinction was central to the Court's analysis. If fraudulent misrepresentation or non-disclosure were ultimately established, insurers would remain entitled to avoid the policy from inception and seek recovery of sums advanced under it. The clause therefore did not confer immunity from the consequences of fraud. Instead, it allocated the commercial risk pending determination of disputed allegations.

The Court considered that there was no public policy objection to commercial parties agreeing that avoidance rights would arise only once the relevant fraud had been established. The Court likened the arrangement to a contractual "pay now, sue later" framework, under which parties must perform their contractual obligations whilst a dispute remains unresolved.

Are defence costs incurred in responding to bribery allegations insurable?

The second issue concerned whether defence costs incurred in responding to the underlying bribery allegations were themselves uninsurable as a matter of public policy.

Insurers argued that the allegations involved serious criminal misconduct and that public policy should prevent the defendants from obtaining the benefit of insurance in connection with such allegations.

The Court again disagreed.

Relying on Coulson v News Group Newspapers Ltd, the Court held that there is no public policy objection to funding the defence of criminal allegations, even where those allegations concern serious offences such as bribery. The critical distinction was between indemnifying the consequences of criminal wrongdoing and funding the costs of defending allegations that remain unproven.

The Court also attached significant weight to the wording of the policy. The definition of "Wrongful Act" expressly contemplated claims arising from alleged breaches of the Bribery Act 2010, whilst criminal fines and penalties were separately excluded from cover. In the Court’s view, this reflected a conventional allocation of risk within D&O insurance whereby defence costs may be covered pending determination of allegations, whilst the consequences of established criminal wrongdoing are not.

The Court therefore concluded that the defendants' defence costs were capable of being insured and remained recoverable under the policy notwithstanding the nature of the allegations they faced.

What does the judgment mean for insurers?

It is not often that reported decisions address issues of this nature, particularly given the prevalence of arbitration clauses in financial lines policies.

The judgment confirms that final adjudication wording has consequences extending beyond conduct exclusions and, where clearly drafted, may operate as a substantive restriction on an insurer's ability to avoid for alleged fraudulent misrepresentation or non-disclosure.

At the same time, the decision should not be read more broadly than necessary. The Court was concerned with the interim period between allegation and proof. It did not address the position once fraud has been established, nor did it consider whether defence costs advanced prior to adjudication remain recoverable or whether cover would continue to respond following a finding of fraud.

Finally, the judgment does not require insurers to await the outcome of the underlying proceedings before seeking to rely upon avoidance rights or conduct exclusions. Whether and when the relevant conduct has been established will depend on the wording of the particular policy and the contractual mechanism agreed by the parties.

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[1] [1923] AC 773

[2] [2003] UKHL 6

[3] [1907] AC 351

[4] [2012] EWCA Civ 1547