Insurers Cannot Withhold Defence Costs From Petrofac Defendants Under D&O Policy

In a closely followed decision with wide-ranging implications for directors and senior executives, the High Court has found that two former Petrofac directors accused of bribery can continue to recover their defence costs from insurers. 

Insurers must pay Petrofac defence costs under Directors and Officers (D&O) policy 

Following an expedited day-long hearing at the High Court on 9 September 2026, Mr Justice Jacobs has ordered that nine insurance companies must continue to cover the defence costs of two former Petrofac directors. 

The Petrofac defendants face bribery charges for alleged corrupt payments made in the UAE between 2012 and 2018 that helped Petrofac secure high-value oilfield service contracts. The executives’ four-month trial is set to commence in November 2026. Both defendants’ defence costs have so far been covered by Petrofac’s D&O policy, as is common practice in criminal defence for board-level executives. Nine Lloyd’s insurers sought to challenge this status quo, arguing they were entitled to avoid the D&O policy and should not have to pay the defendants’ legal fees. 

The insurers argued the policy was validly avoided because the defendants had allegedly acted dishonestly by failing to disclose information about the alleged bribery scheme to the insurers. The defendants – who maintain they are unable to pay their defence costs without the insurance – argued that it was not for the insurers to be arbiters of their guilt. On the premise of innocent until proven guilty, the insurers must continue to pay out until a criminal court determines any wrongdoing (or they admit guilt). 

Background 

The oil and gas company, Petrofac, was the subject of a widely reported SFO investigation into suspected bribery, corruption and money laundering. Launched in May 2017, the investigation concerned £32m worth of bribes made to secure oil contracts across the UAE, Saudi Arabia and Iraq valued at £32.6bn. 

Petrofac pleaded guilty to a failure to prevent bribery, with its corruption described at the time of sentencing as “systemic, serious and grave”. The company paid out total fines of approximately £76m. Its former Global Head of Sales also pleaded guilty to multiple counts of bribery, receiving a 2-year suspended sentence (reduced from a 7-year custodial sentence for his cooperation with the SFO). 

In February 2024, the SFO charged two further Petrofac executives with bribery offences: Marwan Chedid, Petrofac’s former Chief Operating Officer, and George Salibi, the former Chief Operations Officer of the company’s engineering and construction unit. Both plead not guilty. 

By August 2026, the defence costs incurred by the two executives had already eroded the first two layers of the insurance available under their former employer’s D&O policy. The insurers argued that they were not required to pay out the next tranche of costs because of alleged non-disclosure by Mr Chedid and Mr Salibi, which they say breached the terms of the D&O policy. 

In particular, the insurers claimed that the two had fraudulently misrepresented or failed to disclose material information relating to the alleged bribery which would void the policy. However, the alleged bribery will not be determined until next year, when the criminal trial concludes. It was therefore unclear whether, as a matter of contractual construction, the policy had been avoided in the way the insurers sought to assert. 

Significantly, Mr Chedid and Mr Salibi reported that, if the insurers did not pay out, they would be unable to pay their defence costs beyond the first week of September. The application was given an expedited hearing on 9 September 2026 to determine whether: 

• on a proper construction of the policy and/or as a matter of public policy, the insurers were entitled to avoid the policy and refuse to pay the defence costs where the alleged conduct had not yet been established by final decision of a court, tribunal or regulator (or formal written admission of the defendants); 
• the insurers were entitled to refuse to pay the defence costs on the basis that they are uninsurable as a matter of public policy by reason of the alleged bribery; and 
• in light of the above, whether the insurers were obliged to pay the defence costs pending a determination of the bribery allegations. 

What is D&O insurance?

Decision 

The proper construction of the D&O policy 

The non-avoidance clause stated as follows:

“The Insurer shall not avoid this policy or any severable part of the policy or exercise any other legal remedy on the grounds of misrepresentation or non-disclosure, except with respect to:

• an Insured who has fraudulently misrepresented or fraudulently non-disclosed material information prior to the conclusion of this contract; 
• […]

where such fraudulent conduct is established by a final decision of a court, tribunal or regulator or by a formal written admission of the Insured.”

The correct interpretation of this clause was disputed between the parties. At common law, a party that has been induced to enter a contract by fraud or other material essential error can rescind the contract as a ‘self-help’ remedy (i.e. one not requiring an order of the court). The other party may then bring proceedings disputing the validity of the rescission if need be. In this case, the disagreement between the parties was whether the clause reflected or altered this common law position.

Mr Justice Jacobs applied the basic principles of contractual construction. Like any other contract, an insurance contract must be interpreted objectively, by asking what a reasonable person, with all the background knowledge that would reasonably have been available to the parties when they entered into the contract, would have understood the language to mean. 

An additional principle relevant to interpretation of the non-avoidance clause is that clear words are necessary before the court will conclude that the parties have agreed to take away rights or remedies otherwise available to a party at common law. 

Mr Chedid and Mr Salibi argued that the effect of the clause was to alter the common law position so that avoidance was modified. It was no longer a ‘self-help remedy’ and instead required the fraudulent conduct to be established by final decision (or admission). 

Mr Justice Jacobs agreed that the final words of the clause “clearly” produced that result, and that was “the clear and only realistic meaning of the words used”, reinforced by the wider context of the policy. The judge firmly rejected the insurers’ counterargument that the final words simply reflected the ordinary position that an avoiding insurer must ultimately (in the event of dispute) establish its case at trial. 

In issues of construction, the court will take account of the commercial consequences of the results of the conflicting interpretations. In Mr Justice Jacobs’ opinion, the conclusion that the insurers only have the right to withdraw coverage once fraud is proved achieved an “important and sensible commercial result”: it stops insurers from unilaterally assessing alleged misconduct and so depriving defendants of defence costs at critical times (as here) in the run-up to trial. For the insurers, providing that protection makes their policies attractive to the market. 

Public policy arguments 

The insurers’ principal argument was founded on public policy. They submitted that even if the defendants’ construction was right, the law should not enforce a term that allows an insured to be protected from the consequences of their own fraudulent wrongdoing. In other words, ‘fraud unravels all’ and no one should be allowed to benefit from their wilful wrongdoing. 

The defendants accepted that the general fraud principle prohibits contractual protection from the effects of an insured’s fraud, but only where this was proven. They argued that there was no public policy that precluded parties from agreeing how allegations of fraud (i.e. unproven fraud) should be treated in the ‘gap’ between uncertainty and resolution. The judge agreed that the effect of the clause was for the insurers (not the insured) to ‘suffer’ in this gap, but that they could recover their loss once the matters had been determined. This was a commercially sensible outcome and reflected the parties’ commercial bargain.

Mr Justice Jacobs went on to say that it would be “very surprising” given the widespread availability and use of D&O policies for insurers to avoid policies for unproven allegations of fraud. He referred to the Court of Appeal decision in Coulson v News Group Newspapers Ltd, in which Mr Coulson (editor of the News of the World) was charged with criminal offences arising from phone-hacking. Mr Coulson’s ex-employer had agreed to pay reasonable defence costs but sought to resist this on the basis of “ex turpi causa” (no action arises out of a base cause). The Court of Appeal rejected this argument stating that “[t]here is nothing contrary to public policy in one person providing funds to another for that other to defend himself against a criminal charge: the Criminal Defence Service does it all the time”. 

Mr Justice Jacobs saw no reason to distinguish or question Coulson, but did note in his judgment the defendants’ other positive public policy reasons for upholding this decision: 

• a defendant in a criminal case is innocent until proven guilty; 
• there is a public interest in defence costs cover being available to professional people, including cover for allegations of wrongdoing; and 
• the need to avoid disruption of the proper running of criminal proceedings. 

Having already considered the public policy arguments, issues two and three were swiftly dealt with and the insurers were ordered to continue paying the defence costs. 

Appeal 

Given the wider importance of these issues to the insurance market, Mr Justice Jacobs granted the insurers permission to appeal, though he noted that he did not consider the merits of an appeal to be particularly strong. 

Comment 

D&O insurance is a vital component of executive compensation, functioning as a critical safeguard for senior managers and board members. The idea that senior executives could be left without cover to defend the actions they took, in apparent execution of their duties, has added to the already heavy burden those executives face following investigation, upon charge and in the run-up to trial. 

Whether or not executives have acted dishonestly, and therefore in breach of any policy, remains (rightly) for the court to decide. Such a decision will follow lengthy scrutiny and challenge and only if the heavy burden of proof is discharged. At that stage, some insurance policies (as in this case) will contain a legal right of recovery to claw back defence costs (however viable that may be in practice). Any prejudging of that outcome obviously undermines the basis for taking out the policies and the vital support and reassurance they are intended to provide for senior management. 

Clearly, terms vary between policies and providers. This case will no doubt have heightened the scrutiny from both insurer and insured as to the scope of cover. It comes at a time of increasing focus on establishing corporate liability and easing the burden of attribution through the actions of senior management. The stakes are now higher for directors, officers and those under whose auspices they act. This decision will accordingly provide welcome reassurance extending far beyond Mr Chedid, Mr Salibi and their advisors. 

D&O insurance is vital for companies to mitigate risks and provide assurance to their leadership team. Anyone contemplating or currently engaged in a senior managerial position is encouraged to review and assess the terms of their cover. 

Macfarlanes is a pre-eminent law firm advising a global client base across Private Capital, Private Wealth, M&A and Disputes.

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