Intergraph Best (Vic) Pty Ltd & Ors v QBE Insurance Ltd [2005] VSCA 180

"5. Whether between June 1997 and December 1999 any member of the staff of Intergraph:

(a) was directed to make telephone calls to Intergraph; or

(b) engaged in any illegal or improper conduct;

for the purpose of enabling Intergraph to appear to meet certain standards included in Customer Specified Service Standards ("CSSS") or for the purpose of increasing the entitlements of Intergraph under its contract with the Metropolitan Ambulance Service in any other manner.

6. If directions of the kind referred to in paragraph 5 hereof were given:

(a) by whom and to whom were such directions given;

(b) was the direction in breach of the contractual obligations of Intergraph; and

(c) was the giving of the direction illegal or improper ...

5A. Whether between June 1999 and June 2000 any person engaged in any illegal or improper conduct in connection with:

(a) the establishment and maintenance of the systems by which '000' emergency calls for ambulance services have been presented and re-presented to the Intergraph Tally Ho call centre including but not limited to, both hardware and software configurations;

(b) the handling of such calls;

(c) the calculation of call answering statistics for such calls, whether for CSSS purposes or otherwise;

(d) the reporting of call answer statistics for such calls, whether for CSSS purposes or otherwise."

4 During the course of the conduct of the Royal Commission a number of directors and officers of Intergraph were legally compelled to attend the Royal Commission and give evidence in relation to Terms of Reference 5, 5A and 6.

5 The directors and officers did not themselves incur legal costs in relation to these attendances but Intergraph itself incurred and paid legal costs with respect to the legal representation of the directors and officers at such attendances. Intergraph has since claimed these costs from the defendant ("QBE") pursuant to the terms of a Directors and Officers Liability insurance policy. Intergraph is thus seeking direct recovery for its own legal costs, without indemnity have been given to its directors and officers. QBE has denied liability for such costs and Intergraph now seeks to recover the costs in this proceeding.

The Policy

6 By s.1 of the policy QBE agrees to provide indemnity with respect to directors' and officers' liability in two primary circumstances:

"1.1 QBE shall pay on behalf of each Insured Person all Loss for which the Insured Person is not indemnified by the Corporation, arising from any Claim first made against such Insured Person, individually or otherwise, during the Period of Cover, and which is notified to QBE during the Period of Cover.

1.2 QBE shall pay on behalf of the Corporation all Loss for which the Corporation grants indemnification to an Insured Person, as permitted or required by law, arising from any Claim first made against any such Insured Person, individually or otherwise, during the Period of Cover, and which is notified to QBE during the Period of Cover."

7 "Insured person" is defined to include directors and officers of Intergraph. The "Corporation" is Intergraph.

8 "Loss" is defined to mean "the total amount which an Insured Person becomes legally obligated to pay in respect of a Claim made against such Insured Person for a Wrongful Act and shall include damages, judgments, settlements, legal costs and expenses awarded against an Insured Person to any claimant, and Defence Costs."

9 "Claim" is defined to mean:

"(a) a written or verbal allegation of any Wrongful Act communicated to any Insured Person or to the Corporation; or

(b) a civil proceeding commenced by the service of a complaint, summons, statement of claim or similar pleading against any Insured Person alleging any Wrongful Act; or

(c) a criminal proceeding commenced by a summons or charge against any Insured Person alleging any Wrongful Act."

10 "Wrongful act" is defined to mean "any actual or alleged breach of duty, breach of trust, neglect, error, omission, misstatement, misleading statement, or other act committed or attempted by an Insured Person, individually or otherwise, in the course of his duties to the Corporation."

11 It can be seen that QBE's liability pursuant to the insuring clauses is not with respect to loss arising out of a claim against Intergraph but exists with respect to an amount which a director or officer becomes legally obligated to pay arising out of a claim against a director or officer.

12 By s.2 the policy cover is extended to a series of circumstances which amplify the primary insuring clauses. The extension clauses are introduced by the following preamble:

"QBE agrees to provide indemnity as is available under this Section, for nil additional premium,

PROVIDED ALWAYS THAT:

(a) each Extension is subject to the Schedule, Insuring Clauses, Conditions, Definitions, Exclusions, Deductibles and other terms of this Policy (unless otherwise stated herein);

(b) the inclusion of an Extension shall not increase the Limit of Indemnity."

"QBE agrees to pay Defence Costs arising out of any legally compellable attendance by an Insured Person at any official investigation, examination or inquiry in relation to the affairs of the Corporation where such investigation, examination or inquiry may lead to a recommendation in respect of civil or criminal liability or civil or criminal proceedings and which would be the subject of a Claim under this Policy.

PROVIDED ALWAYS THAT:

(a) QBE shall be entitled, at its discretion, to appoint legal representation to represent the Insured Person or Persons involved in the investigation, examination or inquiry;

(b) the investigation, examination or inquiry, or notice of intended investigation, examination or inquiry is made during the Period of Cover and is notified to QBE during the same Period of Cover;

(c) in the event that a claim for payment of Defence Costs is withdrawn or that indemnity under this Policy is subsequently withdrawn or denied, QBE shall cease to advance Defence Costs and the Insured shall refund any Defence Costs advanced by QBE to the extent that QBE is satisfied that the Insured was not entitled to such Defence Costs, unless QBE agrees in writing to waive recovery of such Defence Costs.

For the purpose of this Extension, an official investigation, examination or inquiry includes an investigation, examination or inquiry by way of Royal Commission or conducted by a regulatory authority such as the Australian Securities Commission but does not include any investigation, examination or inquiry conducted by a parliament or any committee of a parliament."

"... costs, charges and expenses (other than regular or overtime wages, salaries or fees of any Insured Person) incurred by QBE or with the prior written consent of QBE (such consent not to be unreasonably withheld):

(a) in defending, investigating or monitoring any Claim, or proceedings and appeals therefrom together with the costs of appeal;

(b) in relation to any legally compellable attendance by an Insured Person at any official investigation, examination or inquiry pursuant to extension 2.3 (Official Investigations and Enquiries).

Defence costs are part of, and not in addition to, the Limit of Indemnity, and payment by QBE of "Defence Costs" reduces such Limit of Indemnity by the amount of any such payment."

15 It is common ground that the costs claimed in the present action fall within the description contained in paragraph (b) of the definition of "Defence Costs", but QBE contends, inter alia:

(a) that the policy does not cover costs which the directors and officers were not legally obligated to pay; and

(b) that cl.4.6 of the policy precludes a claim in the present case.

"QBE shall not be liable under this policy to make any payment for Loss arising from any Claim against an Insured Person:

...

4.6 directly or indirectly based upon, attributable to, or in consequence of:

(a) (i) any dishonest, fraudulent, criminal or malicious

act or omission; or

(ii) any act or omission committed with a reckless disregard for the consequences thereof; or

(iii) any wilful violation or wilful breach of any statute or regulation, or any wilful breach of any contract;

by such Insured Person, where such act, omission, violation or breach is established in fact.

(b) such Insured Person having improperly benefited from securities transactions as a result of information that is/was not available to other sellers or purchasers of such securities;

(c) such Insured Person having gained any personal profit, remuneration or advantage to which such Insured Person was not legally entitled."

The Preliminary Questions

17 In order to expedite resolution of the matter and at the request of the parties, the judge dealing with this matter at first instance in the Commercial List of this Court directed that the two issues raised by QBE referred to above be dealt with by way of preliminary questions pursuant to r.47.01 of the Supreme Court (General Civil Procedure) Rules 1996. The questions stated for trial were as follows:

(1) Does cl.2.3 of the Directors and Officers Liability Insurance Policy Numbered A07999594DOL issued on 24 August 1999 ("the Policy") provide indemnity to the Plaintiffs in circumstances where:

(a) Insured Persons were legally compelled to attend the Royal Commission relating to the Metropolitan Ambulance Service ("the Royal Commission");

(b) those Insured Persons did not incur Defence Costs (as defined in the Policy);

(c) the Plaintiff[s] incurred Defence Costs, as defined in the Policy, arising out of the legally compellable attendance by those Insured Persons at the Royal Commission?

(2) If yes to question 1, does cl.4.6 of the Policy as a matter of construction operate to exclude the indemnity otherwise provided by cl.2.3 of the Policy in the circumstances described in question 1(a) - (c)?[1]

18 The learned trial judge determined that the answer to question 1 was:

"Assuming that the requirements of clauses 2.3 and 7.4[2] were otherwise satisfied, QBE is liable to pay Defence Costs under clause 2.3 of the Policy notwithstanding that the Defence Costs were incurred not by the Insured Person but the Plaintiffs."

19 The learned trial judge further determined that the answer to question 2 was "yes".

The Appeals

20 QBE now appeals the answer to question 1 and Intergraph appeals the answer to question 2. We shall deal first with question 1.

21 QBE contends that the preamble to that part of the policy in which cl.2.3 appears, provides that each extension is subject to the insuring clauses, conditions, definitions and exclusions in the policy. Clause 2.3 is therefore to be construed so as to conform to the classes of cover provided by the policy. Defence costs incurred by the corporation in respect of which the directors and officers were not personally liable fall within neither of the classes of cover provided by the insuring clauses. The construction adopted by the primary judge would have the effect that cl.2.3 provides direct cover to the corporation (not the directors and officers of it) which is at odds with the overall structure of the policy, and which would be alien to the common understanding of a directors and officers liability insurance policy. Furthermore the interests of directors and officers of a corporation may or may not overlap with those of the corporation, and often may be in conflict.

22 Conversely, Intergraph contends that cl.2.3 does not stipulate that the defence costs be paid by the directors and officers, or on their behalf, by way of indemnity. It is further submitted that it was commercially and practically sensible for Intergraph to incur the costs arising out of the legally compellable attendance of its directors and officers as witnesses before the Royal Commission. Such representation sought to avoid any subsequent claim being made against the directors and officers. Likewise, it was commercially and practically sensible for the policy to provide cover to Intergraph in these circumstances. Accordingly the language of cl.2.3 and the relevant definitions contained within the policy extend to a claim such as the present.

The Nature of the Policy

23 The insurance policy with which we are concerned is of a type which became prevalent during the 1980s. It provides two standard components of cover. It first provides direct cover to directors and officers for claims against them arising out of the performance of their duties to the company. Secondly, it provides cover to the company to the extent that it is permitted or required to indemnify the directors and officers with respect to such claims.

24 In the United States courts have consistently held that polices of this type do not insure the company except to the extent that the company indemnifies the insured directors and officers. Accordingly, such policies do not insure the company against litigation or defence costs incurred by it. In Clark v. General Accident Insurance Co. Pty. Ltd. & Anor.[3] Chief Judge Moore of the District Court reviewed a number of authorities[4] and stated:

"These provisions have been interpreted to mean exactly what they purport to state, i.e. that the named insured is not covered except to the extent that it may indemnify its directors and officers for covered loss incurred by them."[5]

25 If the company engages legal representation on behalf of directors and officers but such directors and officers have no personal obligation to pay for such representation, then a policy of this type will not ordinarily cover the costs incurred by the company. In Telxon Corporation v. Federal Insurance Co.[6] a decision of the United States Court of Appeals Sixth Circuit, Telxon engaged counsel to defend itself in litigation and co-counsel to defend its directors. It sought to recover the cost of the co-counsel pursuant to a directors and officers insurance policy. The Court held:

"Telxon's D. & O. policy unambiguously covered only losses that the 'insured persons' - here, Meyo and Wipff - were 'legally obligated to pay.' The 'ordinary and commonly understood meaning' of this provision is that Telxon's D. & O. policy necessarily excludes from coverage any amount that Meyo and Wipff were not legally obligated to pay.

We conclude that Meyo and Wipff were never 'legally obligated to pay' Goodman and Skadden [the co-counsel]."[7]

26 In our view it is proper to have regard to United States authority for the reasons articulated by Kirby, J. in Johnson v. American Home Assurance Company[8]:

"Insurance is substantially a national, even an international, market. Many insurers, including the insurer in this case, are associated with international corporations offering the same or similar policies in a number of jurisdictions. Particular words and phrases in policies are often the subject of elucidation by courts in different jurisdictions. Although competition, legislation and public policy encourage variations in the writing of policies, so that they address the particular needs of the particular insured, insurance is commonly offered in standard form policies which have a national or international provenance. Courts recognise this fact and the consequence that risks may be assessed, and re-insurance procured, on the footing that settled interpretations of commonly used language will not be disturbed without good reason. There are many illustrations of cases where a phrase, recurring in insurance documents, is taken by the courts to have a "well settled" meaning conformably with the commercial purposes of the document. If a settled meaning is demonstrated, given the nature of the insurance market and its function, courts will hesitate before substituting a meaning which is at odds with that which is settled by past decisions."

27 In the present case the appellant accepts that the costs in issue do not fall within the categories of risk covered by either of the two primary insuring clauses. It is thus only if extension 2.3 is sufficient to embrace the claim that it can succeed. In McCann v. Switzerland Insurance Australia Ltd[9] Gleeson, C.J. stated:

"A policy of insurance ... is a commercial contract and should be given a businesslike interpretation. Interpreting 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."[10] (Citations omitted)

28 In our view the object of cl.2.3 is to extend the cover provided by the two primary insuring clauses to circumstances anterior to a claim against a director and officer by covering preliminary official inquiries. Cover is thus provided in circumstances and at a time at which there is no claim and may never be a claim. It does not, however, transform the policy into one which offers an entirely new category of cover, namely cover to Intergraph with respect to loss which does not arise out of a legal obligation of the officers and directors. The preamble to the extension provisions including cl.2.3 makes clear that the extensions are subject to the insuring clauses unless otherwise stated. Clause 2.3 is thus to be understood as an extension of the cover provided by cls.1.1 and 1.2. It is an extension which operates within the framework of those clauses. It does not provide for an entirely new category of risk, namely a risk independent of loss founded in the legal obligations of the officers and directors. So to construe the document would fundamentally transform the commercial circumstances which it addresses.

29 A consideration which the learned trial judge regarded as supporting the view contrary to our own was the terms of the inclusion of "Defence Costs" in the definition of "Loss". We shall repeat that definition for convenience:

" 'Loss' shall mean the total amount which an Insured Person becomes legally obligated to pay in respect of a Claim made against such Insured Person for a Wrongful Act and shall include damages, judgments, settlements, legal costs and expenses awarded against an Insured Person to any claimant, and Defence Costs"

30 His Honour construed this definition as comprising two distinct categories of loss: first, an amount which an insured person is legally obligated to pay in respect of a claim and, secondly, defence costs. We doubt, with respect, that the use of a

comma prior to the phrase "and Defence Costs" justifies this conclusion. The better view seems to us to be that the definition of "Loss" requires an amount which an insured person becomes legally obligated to pay. Such amount may include, first, legal costs awarded against an insured person and secondly, defence costs. In any event, however, we think that the definition of "Loss" cannot control or materially affect the meaning of cl.2.3 in which it does not appear. The critical question is, rather, the proper construction of cl.2.3 within the context of the policy as a whole.

31 In this Court the appellant contended that the exclusion from cover in the definition of "Defence Costs" of "regular or overtime wages, salaries or fees of any Insured Person" shows that the expression "Defence Costs" in cl.2.3 was intended to cover costs incurred by Intergraph, since such "wages, salaries or fees" would not be incurred by directors or officers, but plainly could be incurred by Intergraph itself. This was said to be an explicit recognition that the employer, Intergraph, could be the insured party incurring "Defence Costs". But the answer to this contention is, we think, that the policy covers the indemnification by Intergraph of the defence costs of directors and officers, but merely excludes from cover regular and overtime wages, salaries and fees of directors and officers so indemnified.

32 In our view the appeal must be allowed with respect to question 1 and the question should instead be answered, "No, cl.2.3 of the Policy does not provide indemnity to the plaintiffs in the circumstances stated."

33 The answer to question 1 is conclusive of the proceeding. It is thus unnecessary to deal with question 2.

34 I agree with Charles, J.A. and Osborn, A.J.A., for the reasons they have stated, that the appeal should be allowed and the questions dealt with as their Honours propose.

[1] Question 2 was reformulated by agreement for the purposes of clarification during the course of argument before this Court on appeal.

[2] The definition of "Defence Costs".

[3] 951 F. Supp. 559 (D. Virgin Islands 1997)

[4] Farmers & Merchants Bank v. Home Insurance Co., 514 So.2d 825, 828 (Ala.1987); see also Edinburg Consolidated Independent School District v. St. Paul Insurance Co., 783 S.W.29 610, 612 (Tex.App.-Corpus Christi 1989); St. Paul Guardian Insurance Co. v. Canterbury School of Florida, 548 So.2d 1159 (Fla.Dist.Ct.App.1989).

[5] Clark v. General Accident Insurance Co. at 561

[6] [2002] USCA6 372; 309 F. 3d 386 (6th Cir. 2002)

[7] Ibid at 391

[8] [1998] HCA 14; (1998) 192 C.L.R. 266 at 272-3, this being the second principle stated in [19]; see also McCann v. Switzerland Insurance Australia Ltd. [2000] HCA 65; (2000) 203 C.L.R. 579 at 600-1; and see Wilkie v. Gordian Runoff Ltd. [2005] HCA 17; (2005) 79 A.L.J.R. 872 at 879 [46]

[9] [2000] HCA 65; (2000) 203 C.L.R. 579 at 600-1

[10] Ibid at 589 [22], approved by Gleeson, C.J., McHugh, Gummow and Kirby, JJ. in Wilkie v. Gordian Runoff Ltd at [15].