Where a Directors and Officers Policy provided that the insurer was not liable in connection with any claim based on “any circumstance which was known about by any of the Directors or Officers or Company prior to the Period of Insurance”, it was held that the word “circumstance” meant a circumstance which was known by the insured director to expose, or at least potentially expose, him to legal liability to a third party. The juxtaposition of “circumstance” and “Claim” in the policy indicated that a “circumstance” is of the same general character as a claim, meaning a demand for compensation or other relief. Although the director knew of the severe financial distress of the company and that it could not compete the relevant building contract in a timely fashion, and failed to disclose these facts, his knowledge of these facts was not sufficient to constitute the knowledge required in terms of the exclusion. The director did not know that his conduct exposed him to any personal liability nor potential liability to the other contracting party of the company and the exclusion did not apply.
The claim nonetheless failed because of the operation of an exclusion regarding the director gaining personal advantage by the non-disclosure of the facts.
Hakea Holdings (Pty) Ltd v McGrath (No 2)  FCA995 (Federal Court of Australia)