Daniel Wilkie v Gordian RunOff Limited & Anor

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4880/03 Daniel Wilkie v Gordian RunOff Limited & Anor JUDGMENT 1 HIS HONOUR: The Plaintiff, who is an executive officer or employee of FAI Insurance Limited has brought proceedings against the Defendants, Gordian RunOff Limited (formerly known as GIO Insurance Limited) and Markel Syndicate 702 at Lloyds, London (formerly known as R E Brown Syndicate at Lloyds, London) claiming the payment in advance of costs for defending himself in proceedings brought against him by the Australian Securities and Investment Commission (ASIC). 2 It is common ground that:

(1) The Defendants issued the Directors & Officers/Company Reimbursements Policy No. C10028984 (the policy) dated 23 February 2000 which covers the Plaintiff as an officer of FAI Insurance Limited or one of its subsidiaries.

(2) By Information and Summons dated 29 May 2003, ASIC commenced a prosecution of the Plaintiff under the Corporations Act 2001 (Cth) (the Act). In summary, it is alleged that the Plaintiff, in breach of ss 1309(1) and 1311(1) of the Act, knowingly permitted misleading information to be provided to auditors of FAI Insurance Limited and, in breach of ss 1317FA and 232(2) of the Corporations Law , as taken to be included in the Act by s 1401 thereof, acted dishonestly in the discharge of the duties of his office.

(3) The Plaintiff notified the Defendants of the allegations made by ASIC on 20 November 2002, prior to the laying of the informations and summonses. The Plaintiff notified the Defendants on 2 June 2003 and on 16 September 2003 after he had been served with the informations and summonses.

(4) The Plaintiff requested consent for the advancement of defence costs under the policy orally on 4 June and 20 June 2003, and in writing on 23 July, 12 August and 28 August 2003. The Defendants' response in each case was to the effect that they were considering their position in relation to indemnity.

(5) The Plaintiff has not admitted the matters with which he has been charged, and there has not been an adjudication of those matters by a court, tribunal or arbitrator. 3 By letter dated 25 September 2003 the Defendants advised the Plaintiff as follows: "Gordian RunOff Limited ("Gordian") and Markel Syndicate 702 at Lloyds, London ("Markel") deny indemnity for the claim pursuant to the terms of Exclusion 7 of the Policy. In making this decision, Gordian and Markel have given careful consideration to the relevant findings of the Royal Commissioner and to the voluminous evidence contained in the Crown Brief".

The Plaintiff does not contend that the Defendants acted other than in good faith in deciding to deny indemnity based upon Exclusion 7 and in writing the letter of 25 September 2003. 4 On 19 September 2003 Windeyer J ordered that the question whether the Defendants were entitled to decline to indemnify the Plaintiff for defence costs be determined as a separate question, the terms of which were to be agreed. 5 The matter was heard by me on 25 September 2003. It was agreed that, pursuant to Pt 31, r 2, the following question be determined separately from and prior to all other issues in the proceeding: "In circumstances where: 1. The plaintiff wrote to the defendants and notified a claim ("the ASIC Claim") as described in the affidavit of Mr Scott sworn 16 September 2003; 2. The defendants on 25 September 2003 wrote to the plaintiff stating that "Gordian RunOff Limited ("Gordian") and Markel Syndicate 702 at Lloyds, London ("Markel") deny indemnity for the claim pursuant to the terms of Exclusion 7 of the Policy"; 3. The plaintiff has not admitted that his conduct falls within Exclusion 7; 4. The conduct referred to in Exclusion 7 has not been "subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator"; and 5. The plaintiff does not, for the purposes of the determination of this separate question, allege that the defendants acted other than in good faith in writing the letter referred to in paragraph 2 above, then: Are the defendants free of any obligation to indemnify the plaintiff under Automatic Extension 9 of the Policy when the basis relied upon by the defendants in their letter of 25 September 2003 was solely Exclusion 7 of the Policy?". The relevant provisions of the policy 6 In the Schedule it is stated that the "Organisation" is FAI Insurance Limited. The period of insurance is from 4pm 31 May 1999 to 4pm 31 May 2006. 7 Insuring Clause A provides: "DIRECTORS AND OFFICERS LIABILITY GIO will pay on behalf of the Insured, all Loss arising from any Claim first made against an Insured during the Period of Insurance and notified to GIO during the Period of Insurance by reason of any Wrongful Act PROVIDED THAT the Organisation is not required or permitted to indemnify the Insured for such Loss". 8 Relevant definitions are: "1. Claim means any: (i) written communication to the Insured or to the Organisation, which alleges a Wrongful Act by the Insured; or … (iii) criminal proceedings commenced by a summons or charge against the Insured alleging a Wrongful Act. 2. Defence Costs means: those costs or charges or expenses, incurred in defending or investigating or monitoring Claims or related appeals. Defence Costs does not include: wages or salaries or fees of the Insured, nor the cost of time spent by the Organisation. … 5. Insured means any past present or future: director, secretary, executive officer or employee of the Organisation. … 8. Loss means: the total amount which the Insured and/or the Organisation becomes legally obliged to pay as a result of a Claim made against the Insured for a Wrongful Act. Loss includes: damages, judgements, settlements, costs and Defence Costs. Loss does not include: fines or penalties imposed by law, punitive or aggravated or exemplary or multiple damages, taxes, or matters uninsurable under the law pursuant to which this policy is construed. … 19. Wrongful Act means: any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, or attempted or made (or so alleged) by the Insured in the performance of their duties to the Organisation or any matter claimed against the Insured solely by reason of the Insured serving the Organisation". 9 Of the automatic extensions to the policy clause 9 is relevant and is in the following terms: "9. ADVANCE PAYMENT OF DEFENCE COSTS If GIO elects not to take over and conduct the defence or settlement of any Claim, GIO will pay all reasonable Defence Costs associated with that Claim as and when they are incurred PROVIDED THAT: (i) GIO has not denied indemnity for the Claim; and (ii) the written consent of GIO is obtained prior to the Insured incurring such Defence Costs (such consent not to be unreasonably withheld). GIO reserves the right to recover any Defence Costs paid under this extension from the Insured or the Organisation severally according to their respective interests, in the event and to the extent that it is subsequently established by judgement or other final adjudication, that they were not entitled to indemnity under this policy". 10 The claim for advance payment of defence costs has been denied in reliance upon exclusion clause 7 which provides: "This policy does not insure Loss arising out of any Claim:

… 7. based upon, attributable to, or in consequence of: (i) any dishonest, fraudulent, criminal or malicious act or omission; or (ii) any deliberate breach of any statute, regulation or contract; where such act, omission or breach has in fact occurred; or".

The words "in fact" are defined as follows: "For the purposes of Exclusions 5, 6 and 7, the words "in fact" shall mean that the conduct referred to in those Exclusions is admitted by the Insured or is subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator". 11 Condition 3.1, under "Defence and Settlement", provides: "3.1 Neither the Insured nor the Organisation shall admit liability for or settle any Claim, or incur any Defence Costs, without prior written consent from GIO (such consent not to be unreasonably withheld). GIO shall not be liable for any admission or settlement or Defence Costs to which it has not so consented". The Plaintiff's submissions 12 Mr Leeming, for the Plaintiff, submitted that upon the proper construction of Automatic Extension 9 it is not open to the Defendants to deny indemnity for the claim pursuant to Exclusion 7 because the relevant conduct has not in fact occurred. The point is made that the conduct the subject of the claim has not been admitted, and has not been established to have occurred following the adjudication of any court, tribunal or arbitrator. In other words, the proposition is that the exclusion is only available where the act, omission or breach has in fact occurred and thus a denial of indemnity of a claim based upon the exclusion is ineffective for the purposes of declining a claim for defence costs under Automatic Extension 9 unless and until it can be said that the relevant conduct has in fact occurred. 13 Mr Leeming points out that the insurers' right under Automatic Extension 9 to claw back defence costs only arises after it has been established by judgment or other final adjudication that indemnity was not available under some exclusion or otherwise. By parity of reasoning it is put that the entitlement to rely upon Exclusion 7 to deny indemnity also is only available after there has been that adjudication. The Defendants' submissions 14 Mr Hutley SC, for the Defendants, submits that the effect of Automatic Extension 9 is to require the insurer, if it elects not to take over and conduct the defence or settlement of any claim, to give an indemnity for defence costs unless consistent with its obligation to act with utmost good faith it is in a position to deny indemnity for the claim and does so. In circumstances where the insurer reserves its position (in that it has not decided whether to admit or deny indemnity) the extension operates for the benefit of the insured. 15 With reference to the final paragraph of Automatic Extension 9 it was submitted that it operates to reserve the right of the insurer to recover any defence costs paid under the extension if, ultimately, the insured fails to establish the claim for indemnity. The words "… in the event and to the extent that it is subsequently established by judgment or other final adjudication, that they were not entitled to indemnity under this policy" identify the circumstances in which the insurer is entitled to exercise such right of recovery. It was submitted that these words should not be understood to qualify the entitlement of the insurer to deny indemnity under sub-paragraph (i) of Automatic Extension 9. 16 In respect of each of Exclusions 5, 6 and 7, Mr Hutley SC submitted that its operation is conditional upon it being established that the relevant event or conduct has in fact occurred. As already noted, the policy provides that for the purposes of these exclusions the words "in fact" means that the event or conduct is admitted by the insured or is subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator. Upon its proper construction the definition of the words "in fact" affords the means by which it is ascertained whether or not the exclusion operates. However, so it is put, it says nothing as to the circumstances in which the insurer may assert its denial of indemnity for the claim under Automatic Extension 9. 17 In short, on behalf of the Defendants it is submitted that upon the proper construction of Automatic Extension 9 the proviso in sub-paragraph (i) is satisfied by the assertion of denial. The entitlement to make that assertion is not confined by the ground or grounds upon which the denial is based. The question whether or not the denial is ultimately sustained is relevant to the operation of the exclusion(s), but not to any issue under Automatic Extension 9. 18 In support of the Defendants' case Mr Hutley SC relied on the judgment of Tobias JA (with which Beazley JA agreed, Hodgson JA dissenting) in Silbermann v CGU Insurance Ltd; Rich v CGU Insurance Ltd; Greaves v CGU Insurance Ltd [2003] NSWCA 203. The policy under consideration in that case (the CGU policy) was analogous to the policy in this case, and many of its provisions were substantially similar to those in issue in these proceedings. 19 Relevant provisions of the CGU policy appear in the judgment of Hodgson JA as follows: "7 Section 1 of the Policy is entitled "Operative Clause", and it provides as follows: Directors and Officers Liability Insuring Agreement A The insurer will pay on behalf of the Directors and Officers any Loss for which the Directors and Officers may not be legally indemnified by the Corporation arising out of any Claim, by reason of any Wrongful Act committed by them in their capacity as a Director or Officer, first made against them jointly or severally during the period of Insurance and notified to the Insurer during the indemnity Period.

9 Under the heading "Automatic Extensions" are a number of relevant clauses. First, there is clause 2.1 which is as follows: 2.1 Advancement of Defence Costs Where the Insurer elects not to take over and conduct the defence or settlement of any Claim in the name of any Director or Officer, the Insurer shall meet the Defence Costs of any Director or officer in defending or settling any Claim made against them as they are incurred and prior to the finalisation of the Claim provided always that indemnity in respect of such Claim has been confirmed in writing by the Insurer. Where the Insurer has not confirmed indemnity and it elects not to take over and conduct the defence or settlement of any Claim, it may, in its discretion, pay Defence Costs as they are incurred and prior to the finalisation of the Claim, provided that It has consented in writing to such Defence Costs prior to their being incurred, such consent not to be unreasonably withheld. The Insurer reserves the right to recover any Defence Costs from the Directors or Officers and/or the Corporation severally according to their respective interests in the event and to the extent that it is subsequently established by judgement or other final adjudication that the Directors and Officers and/or the Corporation were not entitled to the Defence Costs so advanced. … 12 Section 3 of the Policy is entitled "Exclusions", and it commences as follows: This Policy does not provide an indemnity against any Claim made against any Director or Officer: There follow a number of clauses, the most relevant of which is cl.3.1, which provides as follows: 3.1 Dishonesty & Fraud brought about by, contributed to by or which involves: (1) the dishonest, fraudulent or malicious act or omission or other act or omission committed with criminal intent of such Director or Officer, (2) such Director or Officer having improperly benefited in fact from securities transactions as a result of information that was not available to other sellers and/or purchasers of such securities; or (3) such Director or officer having gained in fact any personal advantage to which he/she was not legally entitled. However, this exclusion shall only apply to the extent that the subject conduct has been established by a judgement or other final adjudication adverse to the Director of Officer. … 16 Section 5 of the Policy is entitled "Definitions". The most important definitions for these proceedings are those contained in cls.5.1, 5.3, 5.8, and 5.15. The section opens with the following words: Whenever appearing in this Policy the following terms shall be interpreted only in the manner described below: The clauses I have mentioned are in the following terms: 5.1 Claim "Claim" shall mean: (1) any writ, summons, application or other originating legal (criminal, civil or otherwise) or arbitral proceedings, cross claim or counter-claim issued against or served upon any Director or Officer alleging any Wrongful Act; or (2) any written demand alleging any Wrongful Act communicated to any, Director or Officer under any circumstances and by whatever means. 5.3 Defence Costs "Defence Costs" shall mean: all reasonable costs, charges and expenses (other than regular or overtime wages, salaries or fees of any Director or Officer) incurred with the prior written consent of the Insurer in defending, investigating, attending or monitoring any Claim or proceedings, including but not limited to official investigations, examinations, inquiries and the like, or appeals therefrom, together with all reasonable costs of bringing any appeal, 5.8 Loss "Loss" shall mean: the amount payable in respect of a Claim made against the Directors and officers for a wrongful Act and shall include damages, judgements, settlements, interest, costs and Defence Costs. In respect of Section 2.5 (Insured vs insured Cover) and 2.20 (Entity Cover for Employment Practices Liability) this Policy will include back-pay where reinstatement by a court is ordered but excludes any amount which the insured is or was required to pay pursuant to a specific obligation imposed under a contract of employment, employment agreement, statute, award or otherwise. "Loss" excludes a Claim arising from or by reason of or directly or indirectly caused by or arising from fines and penalties imposed by law, punitive, exemplary or aggravated or multiple damages, income tax, customs duties, excise duty, stamp duty, sales tax or any other State or Federal tax or duty. 5.15 Wrongful Act "Wrongful Act" shall mean: any actual or alleged breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or other act done or attempted by or any other matter claimed against any Director or Officer or any of them wherever or whenever while acting in their individual or collective capacities as Directors or Officers". 20 The relevant passages from the judgment of Tobias JA are the following: "65 Subject to the terms and conditions of the Policy including clause 3.1, there is no doubt that Insuring Agreement A in Section 1 thereof provides indemnity against, inter alia, the incurring by the insured of Defence Costs. Accordingly, if such costs are incurred by an insured he or she may seek payment of them by way of indemnity from the insurer. …

68 It is true, as Hodgson JA points out at [48] of his judgment, that clause 2.1 is expressed as an extension to the indemnity given in Section 1 of the Policy and that that indemnity includes indemnity against Defence Costs. However, with respect, I cannot agree that the clause only gives the insurer a discretion in relation to the timing of payment of Defence Costs and only permits the insurer in its discretion to withhold payment of those costs until they have actually been incurred and paid. 69 By definition, Defence Costs are confined to all reasonable costs, charges and expenses "incurred with the prior written consent of the insurer in defending, investigating, ….any Claim". In other words, costs do not become Defence Costs until, with the prior written consent of the insurer, they have actually been incurred. The second paragraph of clause 2.1 empowers the insurer, where it has not confirmed indemnity and elects not to take over and conduct the defence of any Claim, to pay those costs as they are incurred. In my opinion, if the insurer has a discretion to pay such costs in the circumstances postulated it also has a discretion to refuse to pay them. The construction adopted by Hodgson JA, it is respectfully suggested, would mandate the exercise of the insurer's discretion only in favour of payment of Defence Costs notwithstanding a denial or non-confirmation of indemnity. 70 In my opinion, the scheme or structure of the Policy is clear. Insuring Agreement A in Section 1 requires the insurer to pay any Loss arising out of any Claim which Loss includes Defence Costs. However, that prima facie entitlement to indemnify is subject to the terms and conditions of the Policy including clause 3.1. The latter excludes indemnity against the financial consequences of any Claim including any Defence Costs incurred in defending the Claim. Clause 2.1 is an extension of the indemnity in Section 1 in that it provides for the payment of Defence Costs (or, more accurately, their advancement subject to the right of the insurer to recover them pursuant to the last paragraph of clause 2.1) at the discretion of the insurer notwithstanding that indemnity under Insuring Agreement A has been denied on the ground, inter alia, that clause 3.1 excludes it. In other words, clause 2.1 extends the indemnity set forth in Section 1 to advancing Defence Costs pro tem even where a Section 1 indemnity is in dispute as a consequence of the insurer invoking the clause 3.1 exclusion. That this is so is confirmed by the fact that the occasion for any such advancement is that the insurer has not confirmed indemnity (under Section 1) and elects not to take over and conduct the defence of any Claim. 71 In paragraphs 52 and 56.3 of his judgment Hodgson JA accepts that if the insurer raises a clause 3.1 defence to a claim for indemnity under the Policy and, in addition, raises other defences such as (as in the present case) non-disclosure or misrepresentation, then there would be no way in which the insured could compel the insurer to fund its Defence Costs in advance of the final determination of the proceedings in which those defences are litigated. However, with respect, I can find no reason in principle or as a matter of construction of the Policy to justify a distinction between an insurer being entitled to refuse indemnity for Defence Costs where it denies Section 1 indemnity on the grounds of non-disclosure or misrepresentation on the one hand but being required to indemnify those costs where it denies Section 1 indemnity only on the basis of the insured's dishonesty or fraud within the meaning of clause 3.1 on the other. On the approach adopted by his Honour, the insurer would be entitled to exercise its discretion under clause 2.1 of the Policy to refuse to pay Defence Costs where it has declined Section 1 indemnity on the basis of defences other than one invoking clause 3.1 but would be obliged to advance those costs notwithstanding the clear words of clause 2.1 where the only ground upon which it has declined that indemnity is on the basis of dishonest conduct within the meaning of clause 3.1. 72 In my opinion, consistency requires that the second paragraph of clause 2.1 should be given effect to according to its terms which I regard as clear and unambiguous. True it is that under the third paragraph of clause 2.1 the insurer reserves the right to recover any Defence Costs advanced by it where it is subsequently establishes by judgment or other final adjudication that the insured was not entitled to the Defence Costs so advanced. That paragraph provides a necessary protection to the insurer in the event that it exercises its discretion to advance Defence Costs, in whole or in part, pursuant to the second paragraph of clause 2.1. The wording of the third paragraph has obvious similarities to that part of clause 3.1 which provides that the exclusion therein contained is only to apply to the extent that the subject conduct has been established by a judgment or other final adjudication. 73 In my opinion, there is nothing in the second paragraph of clause 2.1 or otherwise in the terms of the Policy which excludes its discretionary operation where Section 1 indemnity is refused by the insurer solely in reliance upon the clause 3.1 exclusion. By its terms it extends to or contemplates a refusal (or non-confirmation) of indemnity on any ground including, for example, non-disclosure and misrepresentation. If this be so, then it must follow that there is no justification to construe the second paragraph of clause 2.1 so as to confine the exercise of the discretion therein provided to refuse to advance Defence Costs where indemnity is declined on one basis rather than another. 74 It was submitted by the claimants and accepted by Hodgson JA that the concluding words of clause 3.1, "has been established", were intended to require the insurer to provide indemnity for Defence Costs unless and until the requisite judgment or final adjudication had been obtained. This is so in the sense that unless such a judgment or final adjudication is obtained the insurer will be unable to rely upon clause 3.1 to ultimately refuse indemnity. As the primary judge said in [45] of his judgment, All that the final paragraph does is make plain that CGU can only sustain its denial of indemnity if the relevant final determination is made. 75 However, clause 3.1 not only excludes indemnity against amounts payable in respect of a Claim but also against the incurring of Defence Costs in defending the Claim. Both elements of the financial consequences of a Claim are encompassed in the definition of Loss. If it be correct that indemnity under Section 1 of the Policy with respect to Defence Costs cannot be refused unless and until a judgment or other final adjudication establishes dishonest conduct in accordance with the concluding paragraph of clause 3.1, then it would also follow that unless and until that occurs the insurer would be required to not only indemnify the insured against Defence Costs but also against any other amounts payable in respect of a Claim where the liability to pay such amounts is determined in proceedings between the insured and the third party claimant before the insurer obtains a judgment against the insured establishing clause 3.1 conduct. 76 Thus if proceedings were brought by a third party against the insured in which, as would be likely, dishonest conduct by the insured is not alleged and those proceedings are finalised and a judgment obtained in favour of the third party against the insured before the finalisation of proceedings between the insurer and the insured, then on the approach adopted by Hodgson JA it logically must follow that the insurer would be required to indemnify the insured not only against the Defence Costs incurred by it in defending the third party claim but also against the requirement to pay any amount determined to be payable in respect of that Claim. In other words the Section 1 indemnity would operate in respect of all the financial consequences of the successful Claim unless and until the insurer managed to establish by a judgment or other final adjudication that the insured was guilty of dishonest conduct in accordance with clause 3.1. In the event that subsequently the insurer obtained a judgment or other final adjudication adverse to the insured within the meaning of clause 3.1, then it may be too late for the insurer to be able to recover the amount payable in respect of the Claim in respect of which it has already provided indemnity. 77 In my opinion, the Policy was not intended to provide a form of "up front" indemnity for the Defence Costs to the insured in the circumstances postulated. The clear structure of the Policy entitles the insurer to refuse indemnity in respect of any part of any Loss including Defence Costs where it asserts dishonest conduct within the meaning of clause 3.1 provided only that it will be ultimately required to indemnify the insured against that Loss unless it establishes by a judgment or other final adjudication that the relevant conduct was dishonest. In my opinion, neither the Policy nor its commercial purpose requires the insurer to advance to the insured either Defence Costs or any other amount payable in respect of a Claim where it has denied indemnity upon any proper ground including that provided by clause 3.1. 78 The construction which I have adopted is not inconsistent with the obligation of good faith which the insurer owes to the insured. I agree with what Hodgson JA has written in [51] of his judgment in this regard. Any defence by the insurer which invokes clause 3.1 must be based on reasonable grounds. In other words, the insurer cannot raise a defence based on clause 3.1 or any other ground for that matter for the purpose of frustrating or delaying the insured's defence of a Claim brought by a third party. Of course, there would be little incentive for the insurer to do this as it might result in a judgment against the insured by default which is then enforced by the judgment creditor and in respect of which indemnity would be claimed by the insured. The insurer would still need to prove (either in proceedings instituted by it or in the third party proceedings) that it has a real defence to the insured's claim to indemnity. 79 For these reasons there may well be cases where it is in the ultimate interest of the insurer to advance Defence Costs pursuant to the discretion vested in it by the second paragraph of clause 2.1 of the Policy so as to ensure that the Claim is properly defended by the insured where it might otherwise be regarded as weak and/or where the potential to successfully sustain its refusal of indemnity based on alleged dishonesty, non-disclosure or misrepresentation is not guaranteed. But it is not obliged to do so irrespective of whether its refusal of indemnity is based on alleged dishonesty or fraud of the insured within the meaning of clause 3.1 of the Policy or upon the basis of non-disclosure and/or misrepresentation by the insured which, although outside the terms of the Policy, would, if established, entitle the insurer, subject to the provisions of the Insurance Contracts Act 1984, to refuse indemnity".

Conclusion 21 I respectfully adopt and follow the analysis and reasoning of Tobias JA, it being directly applicable to the task of construction of the provisions of the policy in issue in these proceedings. In my opinion the terms of extension clause 2.1 and exclusion clause 3.1 of the CGU policy are substantially similar to those of Automatic Extension 9 and Exclusion 7 respectively of the policy in this case. As is apparent from the judgment of His Honour, the issues heard and determined in Silbermann are not realistically distinguishable from those raised by the question for determination in these proceedings. 22 Indeed, as was submitted by Mr Hutley SC (correctly, in my view), Automatic Extension 9 operates more favourably for the insured than extension clause 2.1 of the CGU policy. The second paragraph of the latter confers a discretion upon the insurer to pay defence costs where it has not confirmed indemnity and elects not to take over and conduct the defence or settlement of any claim. It is thus open to the insurer to decline advancement of defence costs where it reserves its position by neither admitting nor denying indemnity, or where it asserts denial of indemnity. However, under Automatic Extension 9 the insurer may decline advancement of such costs only where it has denied indemnity for the claim. Of course, such denial is to be made consistent with the obligation to act with the utmost good faith. 23 In my opinion the scheme of the policy is clear. Insuring clause A requires the insurer to pay any loss, which includes defence costs, arising from any claim provided such loss does not fall within a category which is excluded under the policy. Exclusion 7 therefore operates to exclude indemnity against the final consequences of any claim including defence costs incurred in defending it. 24 Automatic Extension 9 is an extension of the indemnity under insuring clause A in that it provides for the payment in advance of defence costs provided that the insurer has not denied indemnity for the claim and its prior written consent has been obtained. The language of the extension makes plain that the occasion for advancement of defence costs arises where the insurer has elected not to take over and conduct the defence or settlement of any claim, and has not denied indemnity for the claim, and has given prior written consent to the incurring of such costs. The insurer's right to recover such costs is reserved pursuant to the last paragraph of the extension. 25 In my opinion the language of Automatic Extension 9 does not require that indemnity may be denied only after the basis upon which it was asserted has been established. The words of this provision are plain and unambiguous, and it is unnecessary to resort to the rules of construction which apply to insurance contracts in which the meaning is obscure or difficult to ascertain. 26 It follows that, in my opinion, the construction contended for on behalf of the Defendants is correct. 27 Accordingly:

(1) I order, pursuant to Pt 31, r 2, that the question set out in paragraph 5 above be determined separately from any other question in the proceedings.

(2) I answer the question: "Yes". 28 The parties may address me in relation to costs, and arrangements should be made with my Associate by 27 November 2003 for the re-listing of this matter.

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