Does "indemnifiable" require consideration of the operation of exclusion clauses?
28 To a degree, Evolution accepts that the concept of a liability which is "indemnifiable" requires a consideration of the operative effect of the policy's exclusion clauses: see in particular paragraph 26 of its written submissions. The essential point of departure was its submission that until there has been a curial determination of whether an identified exclusion clause excluded cover under the policy, the defence costs clause obliges Chubb to meet its legal costs. Although in this respect it asserts that clause 4.1 used the expression "indemnifiable" (meaning capable of being indemnified) as opposed to "indemnified" (meaning actually within the indemnity), it appears that it sought most support for its submission from Chubb's obligation to "pay" defence costs and from the terms of the definition of "Defence Costs", as opposed to the terms of clause 4.1.
29 Mr Jones SC, on behalf of Chubb, submitted that the word "indemnifiable" referred to a liability that is both within the general insuring clause, in the sense that the insured has a notional liability to the third party, and is not excluded by the operation of an exclusion clause: see a similar use of the word by Meagher JA in Allianz Australia Insurance Ltd v Certain Underwriters at Lloyd's of London Subscribing to Policy Number B105809GCOM0430 [2019] NSWCA 271 [74]. There is force in this submission. In general terms, the ascertainment of the scope of liability cover provided by the policy requires a consideration of both the insuring clause and the exclusions. It is a basic rule of construction that the policy must be read as a whole. That is made clear in this case by the introductory words of the Policy Wording to the effect that the agreement is subject to the terms, conditions and limitations of the policy. It is also made clear by the introductory words to the exclusions section which state that the "Policy does not indemnify the Insured… for any liability directly or indirectly caused by, arising out of or in any way connected with" the matters enumerated therein. On its face it would seem to be unusual to construe the word "indemnifiable" inconsistently with these indicators such that the insured's relevant notional liability was only required to be within the scope of the general insuring clause.
30 In response, Mr Williams SC for Evolution submitted the exclusion clauses do not "directly" impact upon the operation of the defence costs clause because they are only referable to Chubb's obligation to provide an indemnity. So, the submission went, clause 4.1, by its terms, requires Chubb "to pay" defence costs and there is no suggestion of an indemnity being granted in relation to those expenses. On that basis, an exclusion clause limiting Chubb's obligation to indemnify leaves the obligation in clause 4.1 undisturbed. Whilst it can be accepted that the policy's exclusions do not directly impact upon Chubb's obligation to make payments which are not in the nature of an indemnity, the exclusions do have an indirect effect on the operation of the obligation in clause 4.1. That arises by use of the expression "indemnifiable" which necessarily directs attention to the scope of the indemnity provided by the policy. Where, as here, that includes both the Insuring Agreement and the exclusions, if a relevant exclusion applies in the circumstances it will necessarily prevent the clause from operating.
31 On the ordinary meaning of the wording of the Chubb Policy, the construction ascribed by Chubb to the word "indemnifiable" as it is used in clause 4.1 should be accepted. Importantly, "indemnifiable" is used as the touchstone for Chubb's obligation to pay defence costs such that, on its construction, it is only obliged to pay them in relation to claims which, if successful, will come within the Insuring Agreement and are not the subject of an exclusion. In those circumstances the notional liability is capable of indemnification under the policy and will be indemnified if the Third Party's claim succeeds. This results in a sensible commercial construction, that the provision of defence costs will be confined to those claims against the insured which would be indemnified, if the third party established their cause of action. Whilst uncertainty remains as to whether there will be a liability to be indemnified under the policy, the defence costs are applied to support the mutually beneficial outcome of defeating the third party's claim, but only if the insurer would be liable to provide indemnity. Absent that liability, there would be no benefit to the insurer, and if the insured sought to have the indemnity for costs without cover for third party liability, an unusual situation, or wished to have it advanced despite the insurer's challenge to the cover, that benefit could have been purchased specifically.
32 The construction advanced by Evolution involves some difficulties. For instance, it would be an unusual interpretation that results in the insured's notional liability being regarded as "indemnifiable" or capable of being indemnified when it has engaged an exclusion. Ex hypothesi, it is never capable of being indemnified. It also has the further difficulty that it would result in the notional liability's being "indemnifiable" when the parties are in dispute about an operative exclusion clause though not indemnifiable if the insured rightly accepted the insurer's assertion that it applied. It is unlikely that the parties intended that the operation of the defence costs clause was dependent upon the insured's attitude, advanced in good faith or otherwise, to the insurer's rightful invocation of an exclusion clause. That would be commercially unrealistic but it is the necessary consequence of Evolution's submissions.
33 Evolution's construction requires the word, "indemnifiable", to do a lot of work. Whereas, in the initial stage (being prior to the resolution of the rights between the insured and insurer) it would refer to a claim for which there is notional liability to the third party, once it is determined that an exclusion applies, it means that the notional liability must not be within an exclusion. To put it another way, its construction ascribes to it a description of a liability which is within the general insuring clause unless and until there is a judicial determination or an agreement between the parties that an exclusion applies.
34 The construction advanced by Chubb avoids these difficulties. On its construction, its obligation arises when the insured has a notional liability within the insuring promise and no exclusion clause operates to change that. Whilst, in some cases, there may be some uncertainty as to whether the insurer's assertion of an operative exclusion clause is correct, on Chubb's interpretation it will not be obliged to pay the costs of litigation which will only inure for the benefit of the insured because it is in respect of a claim not covered by the policy.
35 As Mr Jones SC quite correctly submitted, the operation of a defence costs clause in the above manner is far from unusual. In Major Engineering v CGU, the relevant clause provided "In the case of … a claim of Public Liability or Products Liability being made against You … for which indemnity is, or would be, available under this Policy, We will pay Your Legal Costs". As it was, the insured had successfully defended a third party claim which had been brought against it, although the costs which it incurred had been considerable and it sought recovery of the amount from the insurer. The dispute involved, in part, whether the claim which had been brought against the insured was within the scope of the policy as being one "for which indemnity … would be available". Bongiorno JA (at 466 [27]) (with whom Hansen JA and Kyrou AJA agreed) held that, in order for the defence costs extension to apply, the insured had to establish that the third party's claim, being either as formulated or by its true nature, was one which, if successful, would engage the indemnity. That was an issue different from the issue here, but his Honour added (at 470 [42]) that in order for a liability to be one for which indemnity was available under the policy, it had to be one for which indemnity was not excluded. On the facts before the Court, the insurer had not discharged its onus of establishing that any of the relevant exclusions on which it had relied were applicable, such that the claim was one in respect of which the defence costs extension applied.
36 The import of this is that the basis on which the defence costs clause was held to operate was consistent with that which Chubb submits should operate in the present case. That is, it is engaged only where the insured's notional liability is not excluded from cover by any exclusion clause. That is not to conflate the wording from the two policies, albeit that they have similarities, but simply to observe that Chubb's interpretation does not result in an uncommercial operation.
37 Chubb also relied upon the decision in Fitzpatrick v Job. In that case the relevant legal costs extension provided, "In addition we will also pay legal costs, charges and expenses incurred as a result of your entitlement to indemnity under this Optional Benefit and incurred with our written consent." Pullin JA held (at [178]) that the clause imposed an obligation on the insurer to pay defence costs if the claims made against the insured were of a kind which, if established, would entitle it to indemnity under the policy. Similarly, in Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance (2018) 359 ALR 314, Meagher JA (at 316 [6]) construed the defence costs extension which applied "in relation to a claim covered under this Policy" as requiring that the third party's claim against the insured was both within the insuring clause and not within an exclusion clause. Again, whilst acknowledging the different policy wordings, there is a consistency in the operation of the clause with that under consideration in this matter.
38 In this context, Mr Williams SC for Evolution relied upon the decision in Karenlee Nominees Pty Ltd v ACN 004 312 234 Ltd (1994) 8 ANZ Ins Cas 61-236 (Karenlee Nominees). There, the insurer asserted that the defence costs extension responded only where there existed an actual liability of the insured to a third party to which the policy responded. A claim had been made against the insured for property damage but had ultimately failed. Hedigan J held that the third party's claim fell within the general insuring clause providing cover for legal liability for compensation in respect of property damage, and that the policy exclusions which applied to the indemnity for liability to pay compensation were irrelevant to the insurer's obligation to pay defence costs with the result that the defence costs extension applied. Mr Williams SC's submission that the clause in the present matter operated in a similar manner should be rejected. In Karenlee Nominees, the defence costs extension was in somewhat expansive terms and provided that "GRE will pay all law costs, charges and expenses incurred …by … the insured … in settlement or defence of claims for compensation". It is apparent that the operation of that extension was conditioned upon the making of a claim for compensation and not, as in the present case, upon the existence of an asserted liability which, if established, will entitle the insured to indemnity under the policy. The decision cited does not assist in the resolution of the issues before this Court.
39 Mr Williams SC submitted that the use of the word, "indemnifiable" as distinct from "indemnified" was significant and supported Evolution's construction. The simple response lies in the recognition that it was used in respect of the promise to indemnify for putative costs in respect of putative liability which may only possibly be incurred. In that case, it was logically appropriate to speak in the hypothetical, "indemnifiable". Further, the expression must be read as a whole, being "indemnifiable under this Policy". Relevantly, the word "indemnifiable" is not limited by reference to "indemnifiable under the general insurance promise."