Section 2 of the Policy
68 It is appropriate first to start with Section 2 of the Policy. Section 2 provides indemnity for Legal Costs for an Inquiry into acts, errors and omissions of the Council, provided that an Inquiry Costs Claim is made against the Insured and notified to the Insurer. For the reasons that follow, I agree with the respondent that given the nature of the BoI, that from both a legal and commercial perspective, Section 2 is the section of the Policy which most readily responds to the Council's claim for indemnity. However, the BoI Costs do not satisfy the definition of Legal Costs in the Policy. This means that the Council's claims with respect to Section 2 must fail, as must its claim for indemnity for Legal Costs under Section 1.
69 Plainly, the BoI falls within the meaning of an Inquiry. The BoI (which the respondent accepts was a Regulatory Authority) was established to investigate the affairs of the Council. This is confirmed by the BoI's Terms of Reference, which were to "inquire into and make findings and recommendations with regard to" certain matters. The powers invested in the BoI by the Act, including s 217, meant that it was able to require, by direction, the attendance of the Mayor, General Manager and councillors during the course of its inquiry, including by way of summons.
70 It is also uncontentious that, as the statement of agreed facts provides at [6(c)] (see [17] above), the BoI, by letter dated 2 December 2015, exercised its power under s 217 of the Act to summon the General Manager of the Council to attend before it to give evidence. On 9 December 2015, the BoI also required the General Manager to produce copies of documents to the BoI pursuant to s 222 of the Act. The former of these letters, and arguably the latter, fall within the meaning of a "written or verbal notice communicated to the Insured requiring the legally compellable attendance of the Insured" to an Inquiry. As submitted by the Council, it is therefore unnecessary to determine whether the BoI's power to direct the attendance of the Mayor, General Manager or councillors as Insureds (separate to the question of the exercise of that power) was sufficient of itself to satisfy the definition of an Inquiry Costs Claim.
71 The real dispute as to Section 2 of the Policy concerned whether the BoI Costs fell within the meaning of Legal Costs as defined. This question is also relevant to two of the alternative constructions of Section 1 of the Policy advanced by the Council concerning Legal Costs and Prosecution Costs.
72 It is convenient to set out the definition of Legal Costs again, noting it is contained in the General Definitions section of the Policy:
Legal Costs
means any reasonable fees, costs and associated expenses reasonably incurred by the Insured following the written consent of the Insurer or paid by the Insurer after a Claim is notified to the Insurer and are incurred solely and exclusively:
(a) in the investigation, defence (including appeal or resisting appeal) and settlement of any Statutory Liability Claim; or
(b) in representing the Insured in relation to an Inquiry Costs Claim
(c) in the investigation, defence (including appeal or resisting appeal) and settlement of any Employment Practices Claim.
however shall not include wages, salaries or other remuneration or benefits paid by the Named Council to its principals, Partners, directors, Officers and any Employee.
Provided that in any event the liability of the Insurer for legal fees and costs for an Appointed Representative where legal fees are charged on a time costed basis the hourly rate will be the lesser of:
(a) the usual hourly charge out rate of the Appointed Representative;
(b) the hourly charge out rate of the Insurer's Nominated Representative for work performed for the Insurer at the time the legal services are provided.
73 Disregarding for the moment the question of whether the BoI Costs can be appropriately characterised as legal fees and costs, a critical element of the definition of Legal Costs is that it is expressed to be limited to fees, costs and associated expenses "incurred by the Insured following the written consent of the Insurer", or, "paid by the Insurer after a Claim is notified". Neither of these limbs can be satisfied by the Council. The Council clearly did not obtain written consent from the Insurer (nor could it have) to incur the BoI Costs before the Minister made a direction under s 229 of the Act. The written consent of the Insurer was irrelevant: the Minister had a wide discretion under s 229 of the Act to enforce the BoI Costs on the Council. Conversely, the BoI Costs were not fees, costs and associated expenses incurred by the Insurer; the costs were imposed upon the Insured after the Ministerial direction. The Council, at least implicitly, appeared to accept this position.
74 This forced the Council to contend that there is an obvious drafting error in the definition: that it should read: "means any reasonable fees, costs and associated expenses reasonably incurred by the Insured following the written consent of the Insurer or paid by the Insured after a Claim is notified to the Insurer" (change in bold). As the respondent submits, there are a number of compelling textual indicators which demonstrate that this contention should not be accepted.
75 First, the text of the definition already deals with the situation where the Insured incurs the relevant legal fees, costs and associated expenses. The definition provides that indemnity will only apply to fees, costs and associated expenses incurred by the Insured "following the written consent of the Insurer". There is a further qualification that such costs, fees and associated expenses must be incurred "reasonably". It could hardly be contended that it was the intention of the Insurer to immediately qualify those limiting characteristics of the indemnity provided for Legal Costs incurred by an Insured by providing that separately, and additionally, the definition of Legal Costs could be satisfied by the Insured merely providing written notice to the Insurer with no requirement that the legal costs thereafter paid were to be "reasonable". The first limb would be given no work to do, given written consent would never be provided to an Insured until after a Claim is notified. This would be a perverse commercial outcome.
76 Secondly, the phrase "incurred by the Insurer" comes after the disjunctive "or". This suggests that the first sentence of the definition of Legal Costs was intended to provide for two separate circumstances in which legal fees, costs and associated expenses could fall within the definition, supporting the conclusion that the use of the word "Insurer" after the disjunctive "or" is not a drafting error.
77 Thirdly, as submitted by the respondent, the Claims Conditions strongly suggest that there is no drafting error in Section 2. Under the heading "Defence", the Insurer has "the right, but not the obligation, to conduct in the name of the Insured the Investigation, defence including appeals and resisting appeals, and settlement of any claim". If the Insurer exercises this right, any amount incurred by the Insurer is deemed to be part of the "Legal Costs". Such costs will then be covered by the indemnity and form part of the limit of liability under Section 2 of the Policy (and aggregate limit of liability), which are both $2 million (see [33] above). This underscores the commercial purpose of the definition of Legal Costs including costs incurred by the Insurer: to limit its maximum liability in respect of any one claim, and aggregate liability during the Policy Period, including its own legal costs, to $2 million.
78 In contrast, where the Insurer agrees to the Insured assuming control of the defence, the Claims Conditions provided that the Insurer will reimburse the Insured "for reasonable Legal Costs in accordance with and subject to the provisions of this Policy". If Section 2 were redrafted as contended for by the Council, this would result in disharmony in the Policy, as the definition of Legal Costs would make no reference to the Insurer incurring legal costs, whilst the Claims Conditions would deem such incurred costs to be Legal Costs as defined. The Claims Conditions would also impose a reasonableness requirement that would not otherwise be required by Section 2 if it read "or paid by the Insured after a claimed in notified to the Insurer". This also undermines the Council's contention that if the Insurer pays for the legal costs "there is nothing on which the indemnity may operate". To the contrary, as the respondent's submitted, it ignores that an indemnity may operate to keep "an insured harmless against loss" as opposed to making good a loss: namely a situation in where the Insurer defends legal proceedings on its behalf: see Globe Church Incorporated v Allianz Australia Insurance Ltd [2019] NSWCA 27 at [118] per Bathurst CJ, Beazley P and Ward JA.
79 This is sufficient to dispose of the Council's contention concerning Section 2 of the Policy and with respect to Legal Costs under Section 1 of the Policy. If I am wrong on the above, there are two further difficulties for the Council which mean that its contention with respect to Section 2 must be rejected.
80 The first difficulty is that paragraph (b) of the general definition of Legal Costs as it applies to Inquiry Costs Claims provides that it only applies to fees, costs and associated expenses incurred solely and exclusively "in representing the Insured in relation to an Inquiry Costs Claim". The BoI Costs were clearly not incurred in representing the Insured: they were the costs of the BoI. The Council submitted that this general definition is modified by the terms of Section 2, which provides that the Insurer agrees to pay reasonable Legal Costs "for an Inquiry" (emphasis added). The use of the word "for" was suggested to only require a causal connection between the legal fees and costs said to be incurred by the Insured and the Inquiry, and to expand the general definition of Legal Costs.
81 This contention cannot be supported. The general definition of Legal Costs expressly provides for the sole and exclusive circumstances in which costs, fees and associated expenses incurred by the Insured or Insurer will be covered by the indemnity provided by Sections 1, 2 and 3 respectively. It is not a sensible construction of the Policy to suggest the use of the word "for" in the indemnifying clause of Section 2 was intended to alter the meaning of Legal Costs as otherwise defined with specific reference to an Inquiry Costs Claim in the General Definitions. The words of the Policy plainly identify that the indemnity does not extend to the costs of a Regulatory Authority or inquirer's costs in relation to an Inquiry.
82 The second difficulty is that even assuming that the definition of Legal Costs could extend to legal fees, costs and associated expenses of the BoI which were paid by the Insured after the BoI was notified to the respondent, there is no evidence that the BoI Costs are "legal fees, costs and associated expenses". It is evident from the definition of Legal Costs that it was the intention of the respondent only to provide indemnity for legal fees and costs in the ordinary sense: fees for work performed by legal professionals and their support staff and associated expenses. This is confirmed by the restrictions on the hourly rate of legal fees and costs charged by an Authorised Representative of the Insurer, and that no indemnity is provided for the "wages, salaries or other remuneration or benefits" paid by the Council to its principals, Partners, directors, Officers and any Employees in relation to legal work. The evident intention was that legal fees, costs and associated expenses would be incurred by solicitors, barristers or other professionals not in the employ of the Council but rather engaged to represent the Council.
83 There is no evidence that the BoI Costs are legal fees, costs and associated expenses of the BoI, and any available inference is to the contrary. As submitted by the respondent, [9] of the statement of agreed facts demonstrates that the amounts constituting the BoI Costs are referable to "Board member fees", "Secretariat/staff salaries (incl. superannuation)" and "Administration": see [23] above. None of those categories can be said to be appropriately characterised as legal fees and costs in the ordinary sense. The Board member fees and secretariat/staff salaries constituted all but $4,490 of the $336,230 in BoI Costs. While one of the BoI members may have been a lawyer, the Council has not adduced any evidence suggesting that she was performing legal services for the BoI. Unsurprisingly, the documentary evidence of the BoI inquiry process does not reveal that an external law firm was engaged. The terms of the letter dated 5 April 2017 also reveal that part of the costs were incurred after the BoI's Report was provided to the Minister by the Director of Local Government undertaking further investigative work outside of the BoI's Terms of Reference.
84 This difficulty also means that the Council's claim for indemnity for Prosecution Costs under Section 1 of the Policy must fail, as Prosecution Costs is defined as "legal fees, costs and associated expenses" payable by the Insured to any Regulatory Authority for proceedings that results in the imposition of Penalties or a finding that an "Offence" has been committed by an Insured. There is no available inference that the BoI Costs were "legal fees, costs and associated expenses" as that phrase is commonly understood.
85 For these reasons, the Council's claim for indemnity under Section 2 with respect to the BoI Costs is rejected.