BOQ Ltd v Chartis Aust Insurance Ltd [2012] QSC 319

INSURANCE - PROFESSIONAL IMDEMNITY - PROFESSIONAL LIABILITY POLICY - EXCLUSION - where policy covered liability for loss and defence costs -where insured supplied financial services to customers - where customers made a claim against the insured in relation to the services - where insurer denied indemnity based on exclusion - whether policy responds to claim for indemnity and defence costs - whether exclusion applies to cover for defence costs.

DECLARATION - where insured contesting claim - where insurer has not accepted facts of claim - whether declaratory relief should be granted in advance of determination of insured's liability to claimant

Australian Securities and Investments Act 2001 (Cth)

Fair Trading Act 1989 (Qld)

Trade Practices Act 1974 (Cth), s 73

Adams v Lambert (2006) 228 CLR 409, referred

AMP Fire and General Insurance Company Ltd v Dixon [1982] VicRp 83; [1982] VR 833, referred

Ashmere Co Pty Ltd v Beekink [2009] FCA 564, referred

Australian Broadcasting Commission v Australasian Performing Rights Association Ltd [1973] HCA 36; (1973) 129 CLR 99, referred

Bass v Perpetual Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334, referred

Dickinson v The Motor Vehicle Insurance Trust [1987] HCA 49; (1987) 163 CLR 500, referred

Edwards v Insurance Office of Australia Ltd [1933] NSWStRp 61; (1933) 34 SR (NSW) 88, referred

FAI General Insurance Co Ltd (in liquidation) v Sherry (2002) 12 ANZ Insurance Cases 61, referred

Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420, referred

Insurance Commission of Western Australia v Container Handlers Pty Ltd (2004) 218 CLR 89, cited

Interchase Corporation (in liq) v FAI General Insurance Company Ltd [2000] 2 Qd R 301, referred

Intergraph Best (Vic) Pty ltd v QBE Insurance (Australia) Limited [2004] VSC 433, cited

Jeans v Bruce [2004] NSWSC 539, referred

Kings College v Allianz Insurance Australia Ltd [2003] QSC 353; [2004] 1 Qd R 394, referred

Lamont v Motor Accidents Board; Hodkinson v Motor Accidents Board: Jorgenson v Motor Accident Board [1983] VicRp 9; [1983] 1 VR 88, referred

Major Engineering Pty Ltd v CGU Insurance Ltd [2011] VSCA 226; (2011) 282 ALR 363, referred

McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, referred

McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; (2007) 157 FCR 402, referred

Parker v Lewis (1873) 8 Ch App 1035, cited

Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1981) 147 CLR 589, referred

Post Office v Norwich Union Fire Insurance Society Ltd (1967) 2 QB 363, referred

Power v Markel Capital Ltd [2007] QCA 284, cited

QBE Insurance (Aust) Ltd v Lois Nominees Pty Ltd [2012] WASCA 186, referred

QBE Insurance (Australia) Ltd v Tropical Reef Shipyards Pty Ltd [2009] FCAFC 161, referred

Quintano v BW Rose Pty Ltd [2008] NSWSC 793, referred

Repatriation Commission v Law [1980] FCA 92; (1980) 31 ALR 140, referred

Rich v CGU Insurance Ltd [2005] HCA 16; (2005) 214 ALR 370, referred

Silberman v CGU Insurance Ltd [2003] NSWCA 203; (2003) 57 NSWLR 469, referred

Swift Australian Co (Pty) Limited v South British Insurance Co Ltd [1970] VicRp 47; [1970] VR 368, cited

Taylor v O'Beirne & ors [2010] QCA 188, referred

Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73, referred

Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522, referred

Wolmerhausen v Gullick [1893] 2 Ch 514, referred

[1] Jackson J: The questions for decision concern whether a claims made policy of liability insurance responds to a claim for indemnity against liability to a third party and costs of defending the third party's claim, and whether declarations to that effect should be granted in advance of the determination of the insured's liability to the third party.

[2] The applicant, Bank of Queensland Ltd ("BoQ") and the respondent, Chartis Australia Insurance Ltd ("Chartis") are parties to the relevant contract of insurance identified as FinancialGuard Professional Services Insurance Policy Number 110061 ("the policy"). The policy may broadly be described as a policy of professional services liability insurance covering loss and defence costs resulting from any claim first made during the policy period for any of the defined wrongful acts. It will be necessary to turn to specific provisions of the policy but first it is appropriate to identify the subject matter in dispute.

[3] BoQ is a respondent to proceedings number NSD1797 of 2010 in the Federal Court of Australia, NSW District Registry, General Division, brought by the Australian Securities Investment Commission, Barry Doyle and Deanna Doyle as applicants ("Doyle proceedings"). The amended statement of claim in the Doyle proceedings, filed on 16 March 2012, runs to 186 pages plus attachments. The amended claim seeks a variety of relief against BoQ, including declarations that BoQ engaged in conduct that was unconscionable (and thereby contravened sections of the Australian Securities and Investments Act 2001 (Cth) ("ASIC Act") or the Fair Trading Act 1989 (Qld) ("QFTA")) by entering into a number of home loan contracts and a mortgage, and by making relevant advances. There is also a claim for a declaration that BoQ was a "linked credit provider" under s 73 of the Trade Practices Act 1974 (Cth) ("TPA") and, therefore, is jointly and severally liable to the Doyles in relation to the liability of Storm Financial Limited (ACN 064 804 691) ("Storm") for misrepresentations or breaches of contract.

[4] As well as the declarations sought, the applicants in the Doyle proceedings claim, as against BoQ, an order directing it to pay to the Doyles the amount of any loss or damage suffered by them by the unconscionable conduct which contravened the ASIC Act or the QFTA. The Doyles claim orders against BoQ that it pay compensation and damages for breaches of contract. Additionally, the applicants claim an order to compensate the Doyles and/or (to prevent or reduce the loss or damage suffered by them) orders declaring the second home loan contract to be void or that BoQ shall not enforce the provisions of that contract or the second home loan mortgage. Similar additional relief is claimed by the applicants against BoQ in respect of the third home loan contract and the third home loan. Lastly, the applicants claim orders that BoQ shall not enforce the provisions of the mortgage, setting aside the mortgage at general law, requiring BoQ to execute a discharge of the mortgage and requiring BoQ to deliver to the Doyles the title documents to their home. Ancillary claims are made for interest and costs.

[5] Summarising, the amended statement of claim alleges:

(a) facts as to the Doyles' background and the investment that they made on Storm's advice;[1]

(b) that BoQ, when entering into three home loan contracts with the Doyles (an initial investment home loan and two refinances as the home increased in value over time), breached an express term of the loan contracts, alternatively engaged in "asset lending" and further engaged in unconscionable conduct;

(c) that Storm breached contractual warranties owed to the Doyles by failing to provide investment advice with due care and skill;

(d) that Storm made misrepresentations to the Doyles in connection with investment advice; and

(e) that BoQ is liable to compensate the Doyles, as a linked credit provider, pursuant to s 73 of the TPA, for loss or damage suffered as a result of Storm's misrepresentations or breaches of contract.

[6] Under the policy, BoQ notified the claim and allegations made against it in the Doyle proceedings via its agent Marsh Pty Ltd. By letter from Chartis to Marsh dated 13 April 2011 Chartis stated that the allegations made in the originating application and statement of claim filed 22 December 2010 "essentially" asserted as against BoQ:

(a) breaches of express terms of each of the three home loan contracts;

(b) that the conduct of BOQ in respect of each of the three home loan contracts was unconscionable; and

(c) that in respect of each of the three home loan contracts, BoQ is liable to the Doyles as a linked credit provider pursuant to s 73 of the TPA for various alleged breaches of contract, warranties and misrepresentations on the part of Storm.

[7] Chartis further stated that in relation to each of those categories it considered that cl 3.9 of the policy operated as an exclusion under the policy, so that BoQ was not covered.

[8] By letter from BoQ to Chartis dated 24 May 2011, BoQ rejected Chartis' contention as to the application of cl 3.9 of the policy and contended that, in any event, BoQ was entitled to indemnity for defence costs, because cl 3.9 only related to Chartis' liability to pay in respect of loss, as opposed to defence costs.

[9] By letter from Chartis to BoQ dated 4 November 2011, Chartis declined to reverse its decision that no cover was available under the policy.

"1. A declaration that, upon the proper construction of [the policy] the respondent is obliged to indemnify the applicant in respect of any loss (as defined in the policy) in respect of [the Doyle proceedings].

1. A declaration that, upon the proper construction of the policy, the respondent is obliged to indemnify the applicant in respect of all sums reasonably paid and payable by it that are characterised as defence costs (as defined in the policy) in respect of the Doyle proceedings.

2. An order that the respondent indemnify the applicant in respect of all sums that it has reasonably paid that are characterised as defence costs (as defined by the policy) in respect of the Doyle proceedings.

3. An order that the respondent pay the applicant's costs of and incidental to this application."

[11] The indemnity clause of the policy provides:

The Insurer shall pay on behalf of each Insured all Loss and Defence Costs resulting from any Claim first made during the Policy Period for any Wrongful Act."

(i) any suit or proceeding, including any civil proceeding, third party proceeding, counter claim or arbitration proceeding, brought by any person against an Insured for monetary damages or other relief, including non-pecuniary relief ...

2.3 Defence Costs means reasonable fees, costs and expenses incurred with the written consent of the insurer (such consent not to be unreasonably delayed or withheld) resulting from the investigation, adjustment, defence and appeal of any Claim. ...

2.10 Loss means damages, judgments, settlements ...

(i) act or error or breach of duty or omission or conduct (including misleading or deceptive conduct) committed or attempted or allegedly committed or attempted by or of the Insured; ...

(a) breach of contract for the provision of Professional Services (not withstanding Exclusion 3.2);

(b) breach of any State or Territory Fair Trading legislation;

(c) breach of the Trade Practices Act 1974 (Cth) (as amended);

(j) breach of the Australian Securities and Investment Commission Act 2001 (Cth) (as amended);

[13] The exclusions of the policy are contained in cl 3. Relevantly that clause provides:

The insurer shall not be liable to make any payment for Loss:

arising out of, based upon, or attributable to any Wrongdoing committed by any Insured provided that:

(iv) this exclusion shall only apply if it is established through a judgment or any other final adjudication adverse to the Insured against whom the Claim is made, or any admission by an Insured that the Wrongdoing did in fact occur.

arising out of, based upon or attributable to any actual or alleged:

(i) loan, lease or extension of credit except to the extent such Claim arises out of a Wrongful Act in the administration of such loan, lease or extension of credit; or

(ii) collection, foreclosure, or repossession in connection with any actual or alleged loan, lease or extension of credit."

The insurer does not assume any duty to defend any Claim brought against the Insured that is covered by this policy. The insured shall defend and contest any Claim made against them, however the Insurer is entitled to effectively associate with the Insured in defence of any Claim.

The Insured shall not admit liability for or settle any Claim or incur any Defence Costs without the written consent of the Insurer, such consent not to be unreasonably withheld. The Insurer shall have the right to make investigations, conduct negotiations and, with the written consent of the Insured, settle any Claim, on such terms and in such manner as the Insurer deems expedient.

Subject to Condition 5.3, if the Insured refuses to consent to any settlement which is recommended by the Insurer and acceptable to the claimant, the Insurers liability for all Loss on account of that Claim shall not exceed the amount for which the Claim could have been settled if the Insurers recommendation had been consented to, plus Defence Costs incurred up to the date of the refusal."

The Insurer shall only be liable for the amount of Loss and Damage Costs arising from a Claim which is in excess of the greater of the Retention specified in the schedule.

The Retention shall be borne by the Insured and shall remain uninsured, with regard to all Loss and Defence Costs for which the Insured shall be liable.

Provided, however, that no Retention shall apply and the Insurer shall thereupon reimburse any Defence Costs paid by the Insured, in the event of:

(i) a determination of No Liability of all Insureds; or

(ii) a dismissal or a stipulation to dismiss the Claim without prejudice and without the payment of any consideration by an Insured.

Provided, however, that in the case of (ii) above, such reimbursement shall occur 90 days after the date of dismissal or stipulation as long as the Claim is not re-brought (or any other Claim which is subject to the same single Retention by virtue of this General Condition 6.4 is not brought) within that time, and further subject to an undertaking by the Bank of Queensland Limited in a form acceptable to the Insurer that such reimbursement shall be paid back by the Bank of Queensland Limited to the Insurer in the event the Claim (or any Claim which is subject to the same single Retention by virtue of this General Condition 6.4) is re-brought after such 90 day period."

Except to the extent the Insurer has denied indemnity for any Claim, the Insurer shall advance Defence Costs in excess of the Retention, if applicable, promptly after sufficiently detailed invoices for those costs are received by the Insurer.

The Insurer may not refuse to advance Defence Costs by reason only that the Insurer considers that conduct referred to in the 'Wrongdoing' Exclusion has occurred, until such time as there is an admission by the Insured, or, a judgment, award or other finding by a court, tribunal or arbitrator with jurisdiction to finally determine the matter (including the outcome of any appeal in relation to such judgment, award or other finding) which establishes the foregoing.

The Policyholder shall reimburse the Insurer for any payments which are ultimately determined not to be covered by this policy."

[17] The declaration sought by paragraph 1 of the application is of a present obligation to indemnify in respect of any Loss in respect of the Doyle proceedings. Adopting the language of the relevant part of cl 1 of the policy, the obligation of the insurer is to pay all Loss resulting from any Claim first made during the policy period for any Wrongful Act. There is no dispute that the claims made in the Doyle proceedings against BoQ were made within the policy period. Clearly, the Doyle proceedings are a civil proceeding brought by ASIC and the Doyles against BoQ for monetary damages or other relief including non-pecuniary relief. They are thus a Claim, as defined in cl 2.2.

[18] Next, it appears that the claim is one for a Wrongful Act, as defined, because it is for an act or error or breach of duty or omission or conduct committed or attempted or allegedly committed or attempted by BoQ, including the alleged breaches of contract, breaches of the QFTA and breaches of the ASIC Act. There may be a question whether BoQ's alleged liability as a linked credit provider under s 73 of the TPA is a claim "for" a Wrongful Act within the meaning of cl 1 of the policy. That question was not raised by either of the parties. For present purposes, it may be put to one side.

[19] The insurer's obligation to pay under cl 1 is engaged by Loss resulting from any qualifying Claim. The definition of Loss is, generally speaking, directed to amounts of established legal liability. A relevant judgment or settlement will involve an ascertained or established amount. The word "damages" in the definition of Loss might operate more widely, but "damages" are usually assessed or found by a court or a tribunal. In the context where the Loss referred to must be loss resulting from a Claim for a Wrongful Act, "damages" in the definition of Loss might be construed as the ascertained or established amount of a liability for damages.

[20] On that basis, a Loss within the meaning of cl 1 of the policy will not arise until the relevant damages are ascertained or established by judgment entered in respect of the claim made in the Doyle proceedings or a settlement thereof. Chartis relies on this point as an answer to the application for the declaration in paragraph 1 - it submits because there can be no liability to pay a Loss which, as defined, is yet to occur.[2]

[21] If that contention is correct, it follows that relief in terms of paragraph 1 of the application cannot be granted.

[22] Chartis also submitted that it would not be obliged to indemnify the applicant in respect of "any" Loss in respect of the Doyle proceedings because the amount of any order for payment of money may not be more than the $250,000 Retention under cl 6.4 of the policy. Similarly, it submitted any obligation to indemnify could depend on the operation of the $25,000,000 aggregate limit of liability under cl 6.3 of the policy. It is not necessary to pursue those points further.

[23] In the course of argument, BoQ submitted that if an order in terms of paragraph 1 of the application could not be made, nevertheless an appropriate declaration could be framed as to Chartis' liability to indemnify for Loss resulting from the claim made in the Doyle proceedings and that such a declaration should be made. The parties were agreed that if I formed that view I could deliver reasons accordingly at which time the form of a relevant declaration might be the subject of further consideration or argument. The same considerations might apply to the order sought in paragraph 2 of the application.

[24] As mentioned previously, Chartis relies on cl 3.9 as excluding its liability to make any payment for Loss in respect of any of the causes of action raised against BoQ in the Doyle proceedings. The contention is that such loss would be Loss arising out of, based upon or attributable to actual or alleged loans.

[25] BoQ submits that the exception to the exclusion applies because its claim for indemnity (for Loss) arises out of a Wrongful Act in the administration of such loan. Thus, the parties' submissions, written and oral, focussed on the operation of and meaning of two of the causal requirements expressed under cl 3.9, namely the expression "arising out of, based upon or attributable to... any ... loan" and the expression "arises out of a Wrongful Act in the administration of such loan".

[26] Chartis contends that the established meaning of "arising out of" is that it signifies a causal relationship that does not require the relationship to be a direct or proximate one[3] and, similarly, that "based upon" and "attributable to" are satisfied by a relationship which may be loose or indirect.

[27] Chartis submits that the claims for breach of contract are: first, claims for breaches of express terms of the three home loan contracts and, secondly, that but for those breaches of contract the Doyles allege that the loans would not have been made to the Doyles with the result that any damages or judgment against BoQ in respect of the alleged breaches of the loan contracts will have a sufficient causal relationship to the three home loans to engage cl 3.9.

[28] BoQ orally submits that Chartis' argument lacks precision in identifying what is required by the words "arising out of, based upon or attributable to" in cl 3.9. It also submits that what is required is a "non-coincidental nexus" or that the causal element be one of the causes of the loss but there need not be a strict causal relationship.[4] The resolution of that dispute may be put to one side until the consideration of other points.[5]

[29] Alternatively, BoQ submits that the Claim in the Doyle proceedings arises out of a Wrongful Act in the administration of such loans so that the exception to the exclusion in cl 3.9 applies. Chartis responds that the breaches of contract relied upon were not acts in the administration of any of the loans because they were acts which occurred before either the relevant loan contract or loan was made and an act "in the administration" of a loan means an act in the management of a loan which has been made.

[30] The parties take similar contradictory positions in respect of the other bases of liability alleged in the Doyle proceedings, namely that the conduct of BoQ in respect of the three home loans was unconscionable and that in respect of each of the three home loan contracts BoQ is liable to the Doyles as a linked credit provided pursuant to s 73 of the TPA. Before consideration of those questions it is appropriate to deal with a further point raised by Chartis.

[31] As to paragraph 1 of the application, Chartis contends that it would be inappropriate to make a declaration as to its liability or as to the operation of the policy, on its proper construction, because the basis of any declaration sought consists only of facts alleged by ASIC and the Doyles against BoQ in the Doyle proceedings, presently by the amended statement of claim. Neither BoQ nor Chartis has accepted those facts as true or as binding upon them. Chartis submits that the consequence would be that a declaration as to the operation of the policy based on those facts would merely be an advisory opinion. A later judgment in the Doyle proceedings may or may not be based on those facts. The declaration would neither determine the issues to Chartis' liability to indemnify nor would it produce a res judicata between the parties.

[32] In support of those submissions Chartis relies on a number of cases.[6] The contention by an insurer that a declaration as to the operation of the policy should not be made in respect of an insured's claim for indemnity because no facts have been agreed between the insurer and the insured is not an attractive point in circumstances like these. I note that "there is authority for the proposition that, as a matter of contractual construction, a judgment (at least after trial) binds the insurer. That is, the insurer cannot contest the insured's liability to the third party in subsequent proceedings under the policy".[7] Also, it will be remembered that Chartis' letter to Marsh dated 13 April 2011 denied liability for Loss under the policy in respect of the alleged breaches of the loan contracts, alleged unconscionable conduct and allegations that BoQ was a linked credit provider by positively contending that cl 3.9 meant there was no cover for the Loss alleged.

[33] Nevertheless, since Bass v Perpetual Trustee Co Ltd,[8] if not before, it has been clear that it is central to the purpose of a judicial determination that it "includes a conclusive or final decision based on a concrete and established or agreed situation which aims to quell a controversy".[9] Thus, if a declaration is made "not based on facts, found or agreed", it will be "purely hypothetical" and "at best ... do no more than declare that the law dictates a particular result when certain facts in the material pleadings are established".[10] Also, if "the relevant facts are not identified and the existence of some of them is apparently in dispute, the answers ... may be of no use at all to the parties and may even mislead them as to their rights."[11]

[34] The High Court of Australia explored a case where the facts are not yet determined further, saying that: "if the 'facts' which are the basis of an answer to a legal question are identified, that answer will have utility for the parties provided that no other evidence could add to or qualify those 'facts'. In such a case, the parties' rights will be determined when the evidence finally determines the existence or non-existence of those 'facts'."[12]

[35] Finally, in a statement in the strongest terms, the High Court said that "it is contrary to the judicial process and no part of judicial power to effect a determination of rights by applying the law to facts which are neither agreed nor determined by reference to the evidence in the case."[13]

[36] Another of the cases relied upon by Chartis, QBE Insurance (Aust) Ltd v Tropical Reef Shipyard Pty Ltd[14] provides an analogy to the present case. In that case, the primary judge determined separate questions relating to the construction of the policy on the basis that the insurer would assume the truth of the facts asserted by the insured in its claim against the insurer for the purposes of determining the separate questions. The unsuccessful insurer sought leave to appeal but on the footing that if it were unsuccessful in the appeal it would still contest, at trial, the factual basis for the declarations that had been made. The Victorian Court of Appeal rejected that approach on the footing that "judicial decisions based on assumed facts are suitable only for questions of law and then only if the facts as pleaded 'exhaust the universe of relevant factual material' (Bass at [50])."[15] That was not so in Tropical Reef "because (the insurer) reserved the right to challenge the assumed facts on the final hearing."[16]

[37] There are other cognate cases not referred to by the parties. Kings College v Allianz Australia Ltd[17] is a close comparator. The insured sought a declaration that it was entitled to indemnity from the insurer in respect of complaints made against it in the Anti-Discrimination Commission and the costs incurred in defending the complaints. The complaints had not been heard and insured disputed liability. There were questions of fact as to any connection between any harm suffered by the complainant and his employment by the insured. Holmes J refused the declarations sought on the ground that it was not useful to make the declarations "in the abstract, in advance of the provision of such evidence, which might in the event lead to the opposite conclusion..."[18]

[38] Similarly, in AMP Fire and General Insurance Company Ltd v Dixon[19], the Full Court of the Supreme Court of Victoria declined to order the determination of the liability of an insurer in advance of determination of the liability of the insured to the claimant. Inter alia, the Court said:

"In ordinary third party proceedings the peculiarity is that the third party is often allowed to contest the liability of the plaintiff to the defendant and his liability to the defendant before the former is established. It is however another thing altogether to say that the liability of an insurer to a defendant can be litigated in independent proceedings before the defendant's liability to the plaintiff has been established or admitted."[20]

[39] In reaching that conclusion, the Full Court distinguished Port of Melbourne Authority v Anshun Pty Ltd.[21] I infer that the existence of other forms of relief in anticipation of a liability which is an element of an entitlement to a money judgment, such as equitable quia timet relief for contribution,[22] also does not trench in any general way upon the availability of declaratory relief against an insurer in advance of the determination of the insured's liability where establishing that liability is a pre-requisite of the entitlement to indemnity.[23]

[40] In my opinion, the proper application of the principles in Bass leads to the conclusion in the present case that a declaration as to the operation and application of cl 3.9 to the claim in the Doyle proceedings for Loss under the policy should not be made because the declaration would be hypothetical.

[41] The application for a declaration that Chartis is obliged to indemnify BoQ in respect of all sums reasonably paid and payable as Defence Costs was opposed by Chartis on similar grounds to those raised in respect of paragraph 1 of the application.

(a) first that, because it has denied indemnity for the Claim made in the Doyle proceedings based on cl 3.9 of the policy, it is not obliged under cl 6.6 of the policy to advance any Defence Costs;

(b) secondly, that if an exclusion of liability under cl 3.9 of the policy applies, there is no obligation to pay Defence Costs resulting from a Claim for any Wrongful Act;

(c) thirdly, in any event, it is not established that the Defence Costs incurred to-date exceed the threshold of $250,000, by way of excess under the policy, pursuant to cls 6.4 and 6.6, and those costs to-date have not been incurred with the written consent of the insurer as required by the definition of Defence Costs in cl 2.3 and by cl 5.2 of the policy.

[43] If Chartis' first and second points are accepted, it would again become necessary to determine the application of cl 3.9 to the Claim made in the Doyle proceedings. That would engage again the considerations which led to the refusal of relief in respect of the declaration sought by paragraph 1 of the application.

[44] BoQ's contentions start at the beginning of cl 3. Because the promise of indemnity under cl 1 is to pay all Loss and Defence Costs resulting from a qualifying Claim, BoQ submits that Chartis is liable to BoQ for Loss from the Doyle proceedings and separately liable to BoQ for Defence Costs of defending those proceedings.

[45] The heads of exclusion of liability under cl 3 are qualified by the text set out previously, namely: "The insurer shall not be liable to make any payment for Loss...". The ordinary meaning of that language is that the exclusions relate to the obligation to pay an amount of Loss, but not to an obligation to pay an amount of Defence Costs, because there is no mention of Defence Costs in cl 3.

[46] Chartis' contention that an exclusion of liability under cl 3.9 displaces the obligation to indemnify in respect of both Loss and Defence Costs is based on the proposition that it would be an "odd result" if cl 3 relieved against liability for Loss only. Chartis gives as an example that it would be odd if the insurer were not liable to indemnify for Loss because the Loss was caused by the insured's fraud under cl 3.8, but the insurer were still obliged to indemnify for Defence Costs of the same Claim.

[47] In my view, that particular example does not depend upon whether such a result is viewed as odd. The text of the second paragraph of cl 6.6 expressly regulates what is to happen when conduct referred to in the "Wrongdoing" Exclusion (i.e. cl 3.8) has occurred. The insurer is not to refuse to advance Defence Costs until the application of cl 3.8 is established in one of the identified ways. The assumption which is made in cl 6.6, therefore, is that the insurer may refuse to advance Defence Costs once the application of the Wrongdoing Exclusion has been established.

[48] It would be anomalous if the insurer were entitled to refuse to advance defence costs under cl 6.6 where it is established that cl 3.8 applies, but ultimately were not entitled to refuse indemnity for those costs under cl 1 and cl 3.8 after they have been incurred.

[49] Thus, there is some textual inconsistency between the operation of the opening words of cl 3 which are directed only to Loss, on the one hand, and the operation of cl 6.6 which is directed to the ambit of the obligation to make advances for Defence Costs where cl 3.8 applies, on the other hand.

[50] There is no dispute that the construction to be preferred is one that gives a business-like interpretation or that "[i]nterpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure."[24] The appropriate resolution of potential inconsistency within a commercial contract is to be undertaken in a way that seeks "to render [the relevant parts of the text] all harmonious one with another", [25] in the context of the policy as a whole.

[51] Additionally, Chartis relies on the exception contained in cl 6.6, which, as set out above, provides for the liability to advance Defence Costs, "[e]xcept to the extent the Insurer has denied indemnity for any Claim...". Chartis submits that supports the right of the insurer to withhold any advance of Defence Costs where indemnity has been denied because it is excluded under cl 3, including under cl 3.9. BoQ submits that the exception provided for in cl 6.6 is to be read more narrowly, and does not authorise a denial of liability under clause 3.9.

[52] In an appropriate case "[w]ords may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency". [26] BoQ submits that its construction is neither inconsistent nor absurd.

[53] BoQ submits that it would be absurd to construe the policy in a way that relieved Chartis from the obligation to indemnify BoQ against Defence Costs in the event that BoQ is successful in its defence of a Claim brought against it. I agree, but that does not answer the question whether Defence Costs are payable in the event of a successful denial of indemnity because of the operation of exclusion cl 3.9.

[54] On the other hand, Chartis submits that the recognition in cl 6.6 that there is no liability to advance Defence Costs where the application of cl 3.8 is established means that the omission of any reference to "Defence Costs" in the opening words of cl 3 cannot mean that Defence Costs are payable for all Claims irrespective of whether any exclusion in cl 3 applies to the relevant claim for Loss. I agree, but that does not answer the question of the application of cl 6.6 in the case of a successful denial of indemnity because of the operation of exclusion cl 3.9.

[55] Neither side was able to point to any other textual indication to support their contention.

[56] Another potentially puzzling outcome is that, if Chartis' contention were accepted, the insurer is not obliged to make any advance for Defence Costs if indemnity is denied by reason of the operation of any of the cl 3 exclusions, except for cl 3.8. By reason of the second paragraph of cl 6.6, clause 3.8 is the only exclusion for which an advance of Defence Costs may not be withheld until application of the exclusion is established. On this view, if the insurer denies indemnity for fraud it is still required to make advances for Defence Costs until the fraud is established. If the insurer denies indemnity under cl 3.9, no express restriction against withholding advances of Defence Costs applies. There is no obvious reason why that is so for every exclusion under cl 3, apart from cl 3.8, but that is how the text operates.

[57] Given the conflicting text in the policy, it is perhaps not surprising that the present case arises. However, the questions whether a liability for defence costs stands independently of liability for loss, or whether a liability to make advances in respect of defence costs stands independently of liability for loss, under liability policies which cover both liability and defence costs are by no means novel. Although the answer must always turn on the language of the particular policy, such questions have been decided at appellate level on a number of occasions in recent times.[27]

[58] In my view, there is no wholly satisfactory solution in the present case. But a business-like approach to the construction and operation of clauses 1, 3 and 6.6 begins with the following premises:

(a) a Claim for Loss under cl 1 will engage the insurer's liability to pay Defence Costs, as costs resulting from the defence of any Claim, whether or not the claim is successful;

(b) the liability of the insurer to pay Defence Costs under cl 1 is subject to the condition precedent that the insurer must have provided written consent to incurring the costs, which consent is not to be unreasonably withheld;

(c) except where the insurer has denied indemnity for the Claim, advances of Defence Costs are to be paid to the Insured under cl 6.6;

(d) the liability to make advances of Defence Costs is also subject to the amount of the Retention being exceeded under cl 6.4;

(e) the liability to make advances of Defence Costs is excluded in the case of it being established in accordance with cl 3.8 that the Wrongdoing Exclusion applies;

(f) a denial of "indemnity for any Claim" under cl 6.6 is a denial of liability to pay a Loss and/or Defence Costs; and

(g) the language of cl 6.6 is broad enough so that it does not greatly assist in determining whether a liability for Defence Costs for a Claim can be excluded by cl 3.9.

[59] There are a couple of other unusual features of the operation of relevant parts of the policy, which add to the difficulty of the questions of construction.

[60] First, cl 6.6 appears in the section of General Conditions of the policy, when it is not a condition at all, but an extension of cover to a liability to advance Defence Costs. It is not clear why cl 6.6 does not appear in section 4 of the policy which contains other extensions of cover.

[61] Secondly, as previously mentioned, the restriction of the obligation to advance Defence Costs until it is established that the Wrongdoing Exclusion in cl 3.8 applies, is not engaged in relation to any other reason why Defence Costs might not be payable.

[62] It is appropriate to examine relevant contextual factors to see if they provide any assistance. The policy in question is a liability policy. In a number of the cognate cases, the subject of the indemnity varies, from broadform liability, to directors and officers' liability, to professional indemnity.

[63] In some policies, the liability to indemnify in respect of defence costs is appropriately described as a "costs extension", signifying that the primary indemnity is for the liability the subject of the claim, with the costs liability being secondary. By contrast, in other policies, the defence costs indemnity is seen as separate rather than secondary.

[64] In the result, however, there is little in these factors which directly assists in answering the present questions. Also, pre-conceived notions as to the ordinary expectations of hypothetical reasonable businessmen are not easily employed to answer the particular questions here. Rather, the surer guide is a close consideration of the contractual text and its operation in particular circumstances.

[65] As previously stated, the exception to the obligation to advance Defence Costs under cl 6.6 applies where there is a denial of indemnity for a Claim by the insurer. A question is whether the exception to cl 6.6 can or should be read down. Among the decided cases, that was done in Wilkie v Gordion Runoff Ltd.[28] The context there was that liability for defence costs arising out of a claim was excluded where it was established that the claim was based upon or was a consequence of a fraudulent act or omission of the insured. The insurer contended that it was entitled to refuse any advance of defence costs on the basis that the liability to advance defence costs was subject to a proviso that the insurer had not denied indemnity for the claim and it had denied liability because of the application of the fraud exclusion. However, the High Court of Australia held that to read the policy as permitting a denial of indemnity on that basis would set the requirement that fraud be established before the fraud exclusion applied at nought and undermine the provision for advances of defence costs to be made in the meantime.

[66] In the present case, a similar argument could be made about a denial of indemnity based on the Wrongdoing Exclusion in cl 3.8 of the policy in relation to an advance of Defence Costs. A denial of indemnity for a Claim under cl 6.6 based on cl 3.8 would be inoperative and the liability to make advances would continue until the application of the Wrongdoing Exclusion is established. However, the question is not whether the restriction of a denial of indemnity based on the Wrongdoing Exclusion applies. It is how the policy operates in relation to Defence Costs if another of the exclusions applies, which is not subject to a requirement that its application must be first established.

[67] Notwithstanding BoQ's contrary submission, there is nothing in the text of either cl 6.6 or the balance of the policy which supports a contention that a restriction on the insurer's entitlement to deny indemnity for any Claim and thereby deny liability to make an advance of Defence Costs applies under cl 6.6 in the case of any exclusion other than the Wrongdoing exclusion.[29] Thus, in the case of a denial of indemnity in respect of a Claim for Loss, based on the application of clause 3.9, there is an exception to the liability to advance Defence Costs under cl 6.6.

[68] That returns the analysis to the argument that the proper construction of cl 3 is that all the exclusions apply to liability under cl 1 for Defence Costs as well as liability under cl 1 for Loss.

[69] The high point of the cases where it was suggested that it would be incongruous for an insurer to be liable to indemnify for defence costs of a claim in respect of which liability for the loss claimed was excluded is McCarthy & ors v St Paul International Insurance Co Ltd.[30] The obligation to indemnify the insured in respect of liability was excluded in respect of liability "for or arising from" eight enumerated matters, including a dishonest or fraudulent act or omission of the insured. The other categories of exclusion included liability arising from a mortgage loan where the insured acted for the client.

[70] The Full Court of the Federal Court of Australia held that a construction of the policy which restricted the operation of the exclusions to liability to the claimant for loss, so that there was no exclusion of liability for defence costs would lead to "inconvenient and obviously unintended results". It was held that "such unlikely commercial results enforce the otherwise available construction... which gives a commercial coherence and business-like meaning to the relationship between the insuring clause and [the exclusion clause]".

[71] A similar argument was given weight in Major Engineering Pty ltd v CGU Insurance Ltd.[31] The insured contended that an exclusion of indemnity against liability caused by professional negligence did not apply to indemnity for defence costs, where the claim was unsuccessful, even though if the claim had been successful liability for the loss would have been excluded. The Court of Appeal of Victoria rejected the argument, accepting (among other things) the rhetorical argument by the insurer: "why should we have to pay for costs when there is no cover under the Policy?" and that the suggested construction "would produce serious anomalies".[32]

[72] On the other hand, the differing reasons in the Court of Appeal of New South Wales in Silbermann v CGU Insurance Ltd[33] and on appeal to the High Court of Australia in that case in Rich v CGU Insurance Ltd[34] show how finely balanced the answer to a question of this kind can be, when the decision is based on such considerations.

[73] It is true that a denial of indemnity under cl 6.6 of the policy may be based on matters which have nothing to do with any exclusion under cl 3. Also, it cannot be said that the insurer's power to deny indemnity for the purposes of cl 6.6 necessarily extends to all of the bases of exclusion under cl 3. But it is clear that it extends to the Wrongdoing Exclusion under cl 3.8, subject to the requirement that the application of cl 3.8 is established, and there is nothing in the text of cl 6.6 which suggests that it is not intended to extend to cl 3.9.

[74] As previously mentioned, the contrary contention comes down to the absence of any reference to Defence Costs in the opening words of cl 3; simply put, that the exclusions under cl 3 do not apply to Defence Costs at all. In the end, I prefer the contrary view, namely that if cl 3.9 applies to a Claim for Loss, and the insurer denies indemnity for the Claim, the insurer is not obliged to pay Defence Costs either, because:

(a) the language of the insuring clause is that the insurer will pay "Loss and Defence Costs" resulting from any qualifying Claim;

(b) it seems to be an unlikely commercial result that the insurer would be ultimately liable (not just by way of advances of Defence Costs) to pay Defence Costs in respect of a Claim which is not otherwise covered because of an exclusion under cl 3;

(c) neither the subject matter of the policy nor the text supports the construction that it is intended that the policy deal with liability for Loss and Defence Costs differently, except for the opening words of cl 3; and

(d) the second sentence of cl 6.6 is clearly inconsistent with that construction in relation to cl 3.8.

[75] Once that point is reached, it seems to me that the proper construction of cl 3.9 and clause 6.6 are resolved in a consistent or harmonious manner, and the insurer would be entitled in a proper case to deny indemnity for a Claim including liability for Defence Costs in reliance on cl 3.9 of the policy. In those circumstances, the insurer is not obliged to advance Defence Costs under cl 6.6, or to pay Defence Costs under cl 1, until the insurer's denial of indemnity is determined to be wrong as between the insurer and insured.

[76] It follows that, for the reasons discussed in respect of the application for declaratory relief under paragraph 1, a declaration should not be made as to the operation and application of cl 3.9 in respect of any liability to pay Defence Costs resulting from the Doyle proceedings.

[1] Paragraphs 1-86 of the statement of claim

[2] Cf Post Office v Norwich Union Fire Insurance Society Ltd (1967) 2 QB 363 at 373G; Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522 at [25]

[3] Relying on Ashmere Co Pty Ltd v Beekink [2009] FCA 564 at [11]; Dickinson v The Motor Vehicle Insurance Trust [1987] HCA 49; (1987) 163 CLR 500 at 505; McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [195] - [197]; Quintano v BW Rose Pty Ltd [2008] NSWSC 793 at [7]; Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 84E-F

[4] Relying on Lamont v v Motor Accident Board; Hodkinson v Motor Accident Board ; Jorgenson v Motor Accident Board [1983] VicRp 9; [1983] 1 VR 88 at 96, Dickinson at 505; Repatriation Commission v Law [1980] FCA 92; (1980) 31 ALR 140 at 150-151

[5] Another relevant case would appear to be Insurance Commission of Western Australia v Container Handlers Pty Ltd (2004) 218 CLR 89 at [45], [77] - [79] and [131]

[6] Bass v Perpetual Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334 at [45]- [49]; Taylor v O'Beirne & Ors [2010] QCA 188 at [24]- [28]; QBE Insurance v Tropical Reef [2009] FCAFC 161 at [21]- [28]; FAI General Insurance Co Ltd (in liquidation) v Sherry (2002) 12 ANZ Insurance Cases 61, 561; Derrington & Ashton_, The Law of Liability Insuranc_e_,_ 2nd ed, pars [13]-[16] and [13]-[19]

[7] QBE Insurance (Aust) Ltd v Lois Nominees Pty Ltd [2012] WASCA 186 at [23], citing Parker v Lewis (1873) 8 Ch App 1035 at 1059; Edwards v Insurance Office of Australia Ltd [1933] NSWStRp 61; (1933) 34 SR (NSW) 88 at 94; Jeans v Bruce [2004] NSWSC 539

[8] [1999] HCA 9; (1999) 198 CLR 334

[14] [2009] FCAFC 161

[15] Tropical Reef at [26] and [27]

[17] [2003] QSC 353; [2004] 1 Qd R 394

[19] [1982] VicRp 83; [1982] VR 833

[20] AMP Fire and General Insurance at 839. Pace, Davies JA (in dissent) in Interchase Corporation (in liq) v FAI General Insurance Company Ltd [2000] 2 Qd R 301 at 311

[21] [1981] HCA 45; (1981) 147 CLR 589 at 595

[22] Wolmerhausen v Gullick [1893] 2 Ch 514

[23] See also Swift Australian Co (Pty) Limited v South British Insurance Co Ltd [1970] VicRp 47; [1970] VR 368 at 369;

[24] McCann at [22]; Wilkie at [15].

[25] Australian Broadcasting Commission v Australasian Performing Rights Association Ltd [1973] HCA 36; (1973) 129 CLR 99 at 109

[26] Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 at 426-427; Adams v Lambert (2006) 228 CLR 409 at [21].

[27] Major Engineering Pty Ltd v CGU Insurance Ltd [2011] VSCA 226; (2011) 282 ALR 363; Power v Markel Capital Ltd [2007] QCA 284; McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; (2007) 157 FCR 402; Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522; Rich v CGU Insurance Ltd [2005] HCA 16; (2005) 214 ALR 370; Intergraph Best (Vic) Pty ltd v QBE Insurance (Australia) Limited [2004] VSC 433; Silberman v CGU Insurance Ltd [2003] NSWCA 203; (2003) 57 NSWLR 469.

[28] [2005] HCA 17; (2005) 221 CLR 522.

[29] It is assumed that the denial of indemnity is made consistently with the insurer's obligation to act in good faith.

[30] [2007] FCAFC 28; (2007) 157 FCR 402.

[31] [2011] VSCA 226; (2011) 282 ALR 363.

[32] (2002) 238 ALR 363 at [41] - [42].

[33] [2003] NSWCA 203; (2003) 57 NSWLR 469 at [70] - [77], per Tobias JA, with whom Beazley JA agreed; cf Hodgson JA at [45] - [58].

[34] [2005] HCA 16; (2005) 214 ALR 370 at [11], per Gleeson CJ, McHugh and Gummow JJ; cf Callinan J at [69] - [71]; see also Kirby J at [28].