Intergraph Best (Vic) Pty Ltd v QBE Insurance

Supreme Court of Victoria|2004-10-29|Before: Habersberger J

INSURANCE - Directors and officers liability insurance policy - Construction of policy - Whether insurer liable for defence costs not incurred by insured person - Whether dishonesty exclusion applies.

The plaintiffs (whom I shall refer to collectively as "Intergraph") or one or more of them were, in the years prior to 1999, responsible for the call system for the Metropolitan Ambulance Service. As such, Intergraph and certain of its directors and staff and former directors and staff were the subject of investigation at a Royal Commission constituted by Letters Patent dated 21 December 1999 and/or were required to attend to give evidence before the Commissioner. I shall refer to these persons as the Intergraph witnesses.

By a writ filed on 23 December 2003 and amended on 17 February 2004, Intergraph claimed against the defendant, QBE Insurance (Australia) Ltd ("QBE"), damages of just over $5 million, being the legal costs incurred by Intergraph in connection with the Royal Commission. The claim is brought under or for breach of a Directors & Officers Liability Insurance Policy No AO7999594DOL issued on 24 August 1999.

The defence filed by QBE on 9 March 2004 and the reply filed by Intergraph on 26 March 2004 raised a number of issues of fact and law, including two issues which turned on the interpretation of the policy and which, I was told at a directions hearing, might resolve the whole litigation or substantially reduce its ambit. Accordingly, at the request of the parties, on 2 April 2004 I directed that these two questions be tried as preliminary questions pursuant to r. 47.04 of the Supreme Court (General Civil Procedure) Rules 1996. These questions were argued upon the terms of the written policy, which were not in issue, and upon the pleadings and a statement of agreed facts dated 16 April 2004.

"1. Does clause 2.3 of the Directors and Officers Liability Insurance Policy Numbered AO7999594DOL 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 Plaintiffs 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 clause 4.6 of the Policy operate to exclude the indemnity otherwise provided by clause 2.3 of the Policy? "

During the argument, it was agreed that, in order to ensure both questions would be considered, the wording of question 2 would be amended so that it read:

"2. Does clause 4.6 of the Policy operate to exclude the indemnity otherwise provided by clause 2.3 of the Policy in the circumstances described in question 1(a) to (c)? "

The Policy is in writing. All of the defined terms in the Policy are capitalised, a practice which I shall follow in these reasons. Section 1 contains two "Insuring Clauses": [1]

"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 such Insured Person, individually or otherwise, during the Period of Cover, and which is notified to QBE during the Period of Cover."

It is necessary to emphasise at the outset that the Policy draws a distinction between "the Corporation", which is any of the five companies listed in the schedule to the Policy, including each of the plaintiffs, and an "Insured Person" which, broadly speaking, includes past, present or future directors, officers or employees of the Corporation, but not "any company, organisation or other body corporate" (clause 7.6). It will therefore be apparent that clause 1.1 deals with the obligation of QBE to make payment in certain circumstances on behalf of each Insured Person, and that clause 1.2 deals with its obligation to make payment in certain circumstances on behalf of the Corporation. Mr Archibald QC, who appeared with Mr Cawthorn of counsel for the defendant, submitted that, as with all Directors and Officers Liability Insurance Policies, this Policy provided protection to individual directors and officers by insuring their personal liability. It did not insure the Corporation except in the case of indemnification by the Corporation in favour of the insured directors or officers[2].

These Insuring Clauses are claims-based, in the sense that the liability of QBE depends upon there having been made a Claim within the Period of Cover.[3] Again, it will be noted that the Claim must have been one made against the Insured Person, not one made against the Corporation. This is emphasised in the definition of "Claim" in clause 7.1 which is in these terms:

(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."

"Wrongful Act" is defined in cl. 7.20 with a like limitation, that is, the act must be that of an Insured Person:

"7.20 'Wrongful Act' shall 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."

Another important concept in the two Insuring Clauses is that of "Loss", which is the subject of definition in clause 7.8:

"7.8 '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, judgements, settlements, legal costs and expenses awarded against an Insured Person to any claimant, and Defence Costs."

I note the comma appearing before the last three words. Mr Hargrave QC, who appeared with Mr Lyons of counsel for the plaintiffs, submitted that the presence of the comma was significant. It indicated that a clear distinction was drawn for the purposes of "Loss" between legal liability in respect of a Claim and Defence Costs. Mr Archibald submitted that the comma could be largely ignored. It was simply marking the point at which one paused for breath. I do not accept this submission. Accordingly, I construe this definition as comprising two categories of Loss: first, an amount which the Insured Person is legally obliged to pay in respect of a Claim and, second, Defence Costs. The wording of the Insuring Clause 1.1 does not specify to whom QBE is to make payments on behalf of the Insured Person. Presumably, loss of the first category would, under the Insuring Clause, be paid by QBE to the claimant or to some other person to whom the Insured Person was obliged to make payment so that the payment discharged that obligation or, perhaps, to some other person to whom the Insured Person might properly make such payment. The second category of loss is simply Defence Costs.

"Defence Costs" is an expression which is defined in clause 7.4:

"7.4 'Defence Costs' shall mean 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 enquiry 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."

Mr Hargrave emphasised that this definition separated out two types of Defence Costs. First, there were Defence Costs in relation to a Claim and, secondly, Defence Costs in relation to a legally compellable attendance within the meaning of extension clause 2.3.

I return now to Section 1. I pass over clauses 1.3 and 1.4 which deal with the time for notification of claims to QBE and which make it clear that liability in QBE may arise whenever the Wrongful Act was committed. The remaining provisions of Section 1, namely clauses 1.5 to 1.8, are expressed to have been inserted "for the avoidance of doubt". Under these clauses, QBE makes it clear that the coverage under the Policy extends to Claims of various kinds, again in each case, Claims against an Insured Person. These are Claims under the Trade Practices Act 1974 or similar legislation, Claims for breach of contract, subject to certain exceptions, Claims for libel and slander and Claims for infringement of intellectual property rights.

Section 2 deals with a number of what are called "Automatic Extensions". These are automatic in the sense that they apply to all polices without any additional premium. They are extensions inasmuch as they give cover in circumstances which are beyond the other insuring provisions of the Policy. Each of the Extensions is expressed to be subject "to the Schedule, Insuring Clauses, Conditions, Definitions, Exclusions, Deductibles and other terms of this Policy (unless otherwise stated herein)" (clause 2.0(a) of the Policy). Clauses 2.2, 2.3 and 2.4 deal with the liability of QBE to pay Defence Costs in circumstances where they would, perhaps, not be payable as part of the Loss as defined in clause 7.8. Clause 2.4 provides for payment by QBE of Defence Costs in respect of Claims against an Insured Person in respect of bodily injury or property damage of a particular kind which loss would be excluded by clause 4.4.

Clause 2.2(a) is not a true extension for it merely provides for the payment of Defence Costs where QBE admits in writing liability for any Claim under the Policy. These are payable under the Insuring Clauses 1.1 or 1.2 as part of the Loss. Clauses 2.2(b) and 2.3 deal with the payment by QBE of Defence Costs in circumstances where its liability to do so under one of the Insuring Clauses has not been established. This may be, as in clause 2.2(b), because QBE has not accepted that it is liable under the Policy to pay for the Loss or, as in clause 2.3, where there has not been and may never be, a Claim made against the Insured Person. In each case, the clause provides for QBE to pay Defence Costs as an advance, on a provisional basis as it were. The clauses are in the following terms:

"2.2 QBE agrees that in relation to any Claim under this Policy:

(a) where indemnity has been confirmed in writing by QBE, then QBE will pay Defence Costs arising from such Claim.

(b) where indemnity has not been confirmed in writing by QBE then:

(i) where QBE elects to conduct the defence or settlement of such Claim, QBE will pay Defence Costs arising from such Claim.

(ii) in any other case QBE may, at its discretion, pay Defence Costs arising from such Claim.

PROVIDED ALWAYS THAT in the event that the Claim 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. 2.3 QBE agrees to pay Defence Costs arising out of any legally compellable attendance by an Insured Person at any official investigation, examination or enquiry in relation to the affairs of the Corporation where such investigation, examination or enquiry 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 enquiry; (b) the investigation, examination or enquiry, or notice of intended investigation, examination or enquiry 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 enquiry includes an investigation, examination or enquiry 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 enquiry conducted by a parliament or any committee of a parliament."

" ... either in the singular or plural, the Corporation and any Insured Person. "

Section 4 of the Policy contains a number of "Exclusions". Clause 4.6 deals with Claims based on a fraudulent, dishonest or other reprehensible Wrongful Act. It is in these terms:

"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 or such securities;

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

Question 1 - Indemnity Under Clause 2.3

It is common ground that the Royal Commission into the Melbourne Ambulance Service was an official investigation, examination or enquiry within the meaning of clause 2.3 and that a number of Intergraph officers and employees and former officers and employees were legally compelled to attend at the Royal Commission. It is likewise not in issue that on 26 April 2000, during the period of cover, Intergraph notified QBE of the Royal Commission and thereby made a claim under the Policy for Defence Costs which it incurred in relation to the Royal Commission and that the investigation was undertaken during the period of cover, so that the requirements of clause 2.3(b) have been satisfied.

The point taken by QBE is that clause 2.3 can operate to require it to pay legal costs only where those costs have been incurred by the Insured Person, in this case the person who has been required to attend the Commission. It is an agreed fact that those persons did not incur Defence Costs, as defined in the Policy; these costs were incurred by Intergraph. The circumstances which are postulated in the question turn upon the identity of the person who incurred the costs, that is, the person who accepted legal responsibility for payment to the legal practitioners of their costs of providing legal services arising out of the legally compellable attendance of the Insured Person at the Royal Commission. If the person who incurred this responsibility was the Insured Person then, if the requirements of clause 2.3 were established, QBE accepted that it was liable. If it was some other person, whether a corporation, a stranger or, perhaps, another Insured Person, then no obligation arises in QBE to respond.

So understood, the question does not require an examination of the purpose for which the legal practitioners were retained; whether it was to protect the interests of the Insured Person or those of the Corporation, or those of some other person. It is sufficient that the legal costs were incurred for one or other of the two purposes specified in parts (a) and (b) of clause 7.4. Counsel on behalf of Intergraph accepted that it may be that the evidence would show that the purpose of the provision of the legal services was a mixture of one or other or both of the specified purposes as well as some other purpose, for example, to protect the interests of the Corporation.

This submission immediately exposes the first of two difficulties with the first question. It is that it contains factual issues which I cannot resolve and which are identified in paragraphs 16 and 17 of the QBE defence. In paragraph 16(b), QBE alleged that the solicitors and counsel who were retained by Intergraph did not represent the interests of directors or officers of Intergraph summoned to attend before the Royal Commission. In paragraph 17 it is pleaded that the legal costs claimed by Intergraph did not arise out of the circumstances provided for in clause 2.3. In its reply, Intergraph simply joined issue with these pleas. The question before me, however, requires me to assume, first, that it was Intergraph and not the Intergraph witnesses who incurred the legal costs and, further, that these legal costs were incurred by Intergraph "arising out of the legally compellable attendance" by the Intergraph witnesses. If it is permissible to pass over the verbal distinction between the conjunctive phrase "arising out of" in part (c) of the question and "in relation to" in clause 7.4 and clause 2.3, it was contended on behalf of Intergraph that the costs incurred by Intergraph referred to in question 1 are therefore Defence Costs within the meaning of the Policy and fall within the opening words of clause 2.3. The issue remaining, which I must assume for present purposes in favour of Intergraph, is that the investigation in question was one of the kind referred to in the second part of the first sentence of clause 2.3. This still leaves the question as to the applicability of the clause to the case where the legal costs were incurred by Intergraph partly for the Intergraph witness and partly for Intergraph itself.

Counsel for Intergraph addressed this difficulty by asserting that, in a case such as this, the question of construction still requires an answer. If the legal representatives of Intergraph also acted in the interests of the individual Intergraph witnesses, it will be necessary to allocate the legal costs incurred between those costs applied for the benefit of Intergraph, which it was accepted are not recoverable from QBE, and those applied for the benefit of the Intergraph witnesses, however limited they might be, which are recoverable under clause 2.3. Such an allocation is discussed in the United States case of Telxon Corporation v Federal Insurance Company[4]. If, upon such an allocation, it appears that no legal work was done for the benefit of the Intergraph witness personally, then the first question ceases to have significance; an allocation is inappropriate.

The second difficulty arises from the way the claim of Intergraph has had to be pleaded. Under clause 2.3, QBE agrees to pay Defence Costs, as defined, in certain circumstances. The clause does not specify to whom these costs should be paid, although, given the terms of clause 2.3(c), it is likely to be to the Corporation or to the Insured Person. But the definition of Defence Costs in clause 7.4 makes it clear that these are costs which have been incurred by QBE or by another unspecified person "with the prior written consent of QBE (such consent not to be unreasonably withheld)". Again, it may be supposed that this other person may include the Insured Person or the Corporation. The present claim concerns legal costs incurred by the Corporation. It is common ground that these costs were not incurred with the written consent of QBE. The claim for Intergraph is, therefore, put as a claim for damages for breach by QBE of its contractual obligation not to unreasonably withhold its consent or for breach by QBE of its obligation to acknowledge its liability to pay these costs.

The first alleged breach of contract raises a host of issues apart from the first question. Indeed, it may be that these issues do not even include the first question. The second alleged breach presupposes the existence of a liability in QBE to pay the costs of the Intergraph witnesses at the Royal Commission, which liability is, of course, in contest. Again, in its defence, QBE raises a number of answers to this suggested liability, some factual and some legal. The latter include misrepresentation and non-disclosure as well as those contained in the two preliminary questions before me.

Notwithstanding these difficulties, and in deference to the wish of the parties to this litigation that I determine the two questions, I shall endeavour to do so. For the purpose, I assume that all of the requirements for the liability of QBE under clause 2.3 are established other than that the legal costs in question were incurred, not by the Insured Person but by the Corporation. Do these assumed requirements include the requirement in clause 7.4 that the Corporation has incurred the legal costs with the prior written consent of QBE? If they do, the question must surely be answered in the affirmative. If, on the other hand, this requirement is not to be taken as having been satisfied, the answer must be in the negative because the legal costs do not satisfy the requirements of clause 7.4. The remedy of Intergraph in those circumstances must be for damages for an unreasonable refusal to consent, as the statement of claim recognises.

This dilemma was, however, passed over in argument before me. The fundamental submission put on behalf of QBE was that the Policy is concerned with Claims made against the Insured Persons, the Intergraph witnesses, not with those against the Corporation, Intergraph, itself[5]. This is apparent, it was said, from the fact that such a Claim must contain an allegation of a Wrongful Act by an Intergraph witness, not by Intergraph (clauses 7.1 and 7.20).

The Policy, however, acknowledges that Intergraph may indemnify its staff member against whom such an allegation is made, in which case, QBE will be liable under clause 1.2 to Intergraph for its loss including the legal costs incurred, "in defending, investigating or monitoring" any such Claim (clause 7.4(a)). But there is no suggestion that Intergraph gave its witnesses any such indemnity. This is not admitted on the pleadings nor is it an agreed fact.

The next step in the QBE argument is to include the various Automatic Extensions contained in Section 2 within this structure. In clause 2.0(a) it is provided that each Extension is "subject to the ... Insuring Clauses, Conditions, Definitions, Exclusions, Deductibles and other terms of this Policy". This is evident from extension clause 2.1 which deals with claims which should have been, but which were not, notified under earlier like QBE policies; from extension clauses 2.5 and 2.6 which provide for cover in respect of subsidiaries of the Corporation; from extension clause 2.7 which requires QBE to provide indemnity under clause 1.2 in circumstances where the Corporation has insufficient funds itself to meet its indemnity obligation; and from extension clause 2.9 which provides cover for representatives or persons claiming through a deceased or incompetent or insolvent Insured Person.

Each of these cases depends upon the fact that a Claim has or might be made against an Insured Person for Wrongful Acts and that the other requirements of the Insuring Clauses have been satisfied. Extension clause 2.4 which deals only with Defence Costs, likewise, does so in the same context. Extension clause 2.2, which also deals only with Defence Costs, does so in circumstances where it is contended, but not yet accepted by QBE, that the requirements of the Insuring Clauses have been satisfied or perhaps in circumstances where, for some other reason, the liability of QBE under the Policy is uncertain.

On behalf of QBE, it was put that clause 2.3, likewise, contemplates the prospect of a Claim against an Insured Person for Wrongful Act. I agree. The official investigation or Royal Commission could therefore be seen as an early step which might ultimately lead to a Claim against an Insured Person which, in turn, could be the basis of a claim upon QBE pursuant to either of the Insuring Clauses. Accordingly, the Defence Costs which QBE agrees to pay under this extension clause 2.3 might be seen as part of the investigation of the apprehended Claim against the Insured Person or even as an investment by QBE in claim avoidance. As such it is provided in clause 2.3(c) that the costs paid might be refundable in certain circumstances by the "Insured". As previously stated, that expression is defined in clause 7.5 as the Corporation and the Insured Person. Accordingly, the obligation to make a refund will fall on one or other of the two persons who are entitled to the benefit of the payment in the event of claim pursuant to one or other of the Insuring Clauses.

Counsel for QBE pointed out that it would be in very limited circumstances that QBE's liability would depend upon clause 2.3, rather than upon clauses 1.1 or 1.2. In many cases the conduct of a Royal Commission or inquiry would give rise to a Claim within the meaning of clause 7.1 because part (a) includes a written or verbal allegation of a Wrongful Act communicated to an Insured Person. The rules of natural justice prohibit the Commission from making a recommendation in respect of civil or criminal liability against an Insured Person without first having put the matter to the person or informing the person of the risk that the recommendation might be made.[6] In such an event, the legal costs of the person would be recoverable under clause 1.1 or clause 1.2 as part of the Loss. Clause 2.3 would, therefore, operate only in circumstances where an adverse recommendation by the Commission was apprehended but where no Claim, as defined, was made or, perhaps, to the extent that the costs were incurred before a Claim was made.

It was submitted by QBE that Intergraph did not challenge the proposition that where Defence Costs are recoverable as part of the Loss under clause 1.1 or clause 1.2 these costs must have been incurred by the Insured Person or by the indemnifying Corporation. Accordingly, it was submitted, the scheme of the Policy must be that this is also the result in the relatively rare cases where clause 2.3 has operation.

The submission put on behalf of Intergraph rests upon two aspects of clause 2.3 which I have already mentioned. The first is that clause 7.4 does not limit Defence Costs to those incurred by the Insured Person; they may have been incurred by any person with the written consent of QBE. It is sufficient that they have been incurred by that person "in relation to any legally compellable attendance" by the Intergraph witness. The second is that clause 2.3 does not specify the person to whom QBE must pay the Defence Costs. Nor is the matter resolved by reference to clause 1.1. Under that provision QBE does not agree to pay Defence Costs as a component of the Loss to the Insured Person but to an unspecified person "on behalf of each Insured Person". In any event, clause 1.1 cannot be relied upon, for the Defence Costs under clause 7.4(b) are not incurred in "defending, investigating or monitoring any Claim" for no Claim has yet been made. In that sense, in the circumstances in which it operates, clause 2.3 is a true extension, for it creates an obligation to pay Defence Costs in circumstances where the Insuring Clause is not operative.

Much of the QBE argument derived its force from an assertion that clause 2.3 should not be interpreted to impose on QBE an obligation to finance any part of a Claim against the Corporation. It was said, correctly in my view, that this Policy does not provide cover for claims against the Corporation. I did not understand counsel for Intergraph to contend otherwise. It must be accepted, however, that, as a matter of commercial and forensic reality, at the Royal Commission level at least, the interests of the Corporation and those of its employees may commonly overlap. Accordingly, it may be supposed that the drafter of the Policy had in mind that, at that level, it may well be that common legal advice and representation will be obtained for them both. Doubtless it was for this reason that definition of loss in clause 7.8 did not impose a requirement that the Insured Person was legally obligated to pay those costs. This enables QBE in the case where a Claim is brought against both the Insured Person and the Corporation for direct and vicarious liability for the Insured Person's Wrongful Act, to provide or pay for common representation even when there is no indemnification of the Insured Person by the Corporation. In such a case, the commercial objectives of the Policy are achieved by permitting the allocation of the legal costs between the Corporation and the Insured Person, with QBE contributing the share of the Insured Person. A similar commercially satisfactory result is achieved where the legal costs are incurred, not in response to a Claim, but in a Royal Commission or inquiry where a recommendation in favour of the Claim is apprehended.

Subject to the qualifications and assumptions to which I have referred, I conclude that, if QBE fails to pay the Defence Costs, as defined, "arising out of any legally compellable attendance" by an Intergraph witness at the Royal Commission, where the Commission may make "a recommendation in respect of civil or criminal liability or civil or criminal proceedings" and which would be the subject of a Claim, as defined, against the Intergraph witness, then QBE is in breach of clause 2.3 of the Policy. If those conditions are satisfied it matters not that the Defence Costs were incurred by Intergraph and not by the Intergraph witness. In that sense, I answer question 1, yes.

It was submitted on behalf of Intergraph that the opening words of Section 4 qualified and limited the operation of each of the exclusion clauses which followed, including in particular clause 4.6. Accordingly, it was submitted, in order to fall within the words of the Exclusions, it was necessary for there to be a claim under the Policy seeking indemnity or payment for:

" ... Loss arising from any Claim against an Insured Person. "

This wording was identical to the language used in the two Insuring Clauses, but was inconsistent with the language used in, and the nature of the entitlement under, clause 2.3. Mr Hargrave submitted that clause 2.3 did not involve the making of a Claim against anybody. It dealt with a situation anterior to that event happening and provided for Defence Costs to be paid to ensure that, in the interests of everybody concerned, the making of a claim did not happen. Therefore, he submitted, in the words of clause 2.0, it was "otherwise stated" in the Policy that the Exclusions did not apply to clause 2.3.

On the other hand, counsel for QBE submitted that the coverage for Defence Costs in clause 2.3 was an extension of the cover in clause 1.1. Clause 2.0 expressly made the extension in clause 2.3 subject to the Exclusions in Section 4. There was no statement "otherwise". The lack of any contrary statement in clause 2.3 was to be contracted with the explicit statements in clause 2.1 and clause 2.4. "Loss" was defined to include Defence Costs. QBE's liability to make a payment was therefore excluded by the opening words of Section 4. Automatic Extension 2.3 extended to and applied to circumstances which might ultimately lead to a Claim under the Policy. It thus amplified and extended the strict definition of the term "Claim".

Finally, Mr Hargrave sought to distinguish the decision of the New South Wales Court of Appeal in Silbermann v CGU Insurance Ltd[7] on the basis that their Honours' reasoning depended on the different wording of the policy in that case. Mr Hargrave contrasted the wording of the relevant provision of the policy in Silbermann: "This Policy does not provide an indemnity against any Claim made against any Director or Officer", with the introductory words of Section 4 of the QBE Policy: "QBE shall not be liable under this Policy to make any payment for Loss arising from any Claim against an Insured Person". Mr Archibald submitted that the argument of the appellants in Silbermann, which was rejected by the Court of Appeal, resembled the argument advanced by Intergraph in this case. Hodgson JA (with whom Tobias and Beazley JJA agreed on this point[8]) held that the policy in question did not draw a clear distinction between an indemnity against a Claim and an indemnity against Defence Costs, as suggested by the appellants. On the contrary, the two types of loss or liability were bracketed together in the definition of "Loss". His Honour further held that the words "indemnity against any Claim" must be read as meaning indemnity against the consequence of any Claim. Such consequences were "Loss" and "Loss" included "Defence Costs"[9]. Mr Archibald submitted that there was no justification for not applying the reasoning in Silbermann to the instant question.

I consider that the Exclusion under clause 4.6 presupposes that there has been a Claim made against the Insured Person and that a Loss has been suffered arising from such a Claim. For the purposes of the liability of QBE under clause 2.3 no such Claim or Loss need have occurred.

Nevertheless, the obligation of QBE to pay Defence Costs under clause 2.3 arises only where the Commission 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". Since a claim based on a fraudulent, dishonest or other reprehensible Wrongful Act is not a Claim under the Policy, no liability under clause 2.3 arises where it appears that the inquiry may make a recommendation in respect of liability or proceedings which would be the subject of such an excluded claim.[10]

Moreover, the payment of Defence Costs under this clause is in the nature of an advance against the Defence Costs which would be payable when the Claim against the Insured Person has been made and the Loss incurred. If it should appear in the course of the Royal Commission or thereafter that such a Claim is not covered by the Policy so that indemnity is denied by QBE, the insurer is entitled under clause 2.3(c) to cease making these advance payments and, further, to recoup the payments already made.

In my opinion, it is clear from the terms of clause 2.3 that QBE is not obliged to pay Defence Costs where the apprehended claim against the Insured Person falls within clause 4.6. The answer to question 2 is therefore in the affirmative.

I therefore answer the questions the subject of the preliminary trial as follows:

Question 1 Does clause 2.3 of the Directors and Officers Liability Insurance Policy Number AO7999594DOL 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 Services ('the Royal Commission');

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

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

Answer

Assuming that the requirements of clauses 2.3 and 7.4 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 by the plaintiffs.

Question 2 Does clause 4.6 of the Policy operate to exclude the indemnity otherwise provided by clause 2.3 of the Policy in the circumstances described in question 1(a) to (c)? Answer Yes.

Once the parties have had the opportunity to consider these reasons, I will hear submissions on the orders or directions which should now be made.

[1] Although clause 6.11(b) provides that "the marginal notes and titles of paragraphs in this Policy are included for descriptive purposes only and do not form part of the Policy for the purpose of its construction or interpretation", the titles of the paragraphs or sections are often useful shorthand descriptions of what they contain. The title of Section 1 is "Insuring Clauses".

[2] Holmes' Appleman On Insurance, 2nd Ed, interim Vol. 23, para. 146.2.

[3] Clause 4.1 excludes cover for claims made against an insured person prior to the period of cover, subject to the extensions granted in clause 2.1.

[4] [2002] USCA6 372; 309 F 3d 386 (6th Cir. 2002) at 391-395.

[5] See, for example, clauses 1.1, 1.2, 4.1 and 5.1.

[6] Mahon v Air New Zealand Ltd [1983] UKPC 29; [1984] AC 808.

[10] See Silbermann v CGU Insurance Ltd [2003] NSWCA 203; (2003) 57 NSWLR 469 at [71], per Tobias JA, Beazley JA concurring.

At a glance

Court

Decision date

Before

Source

Judgment (74 paragraphs)

Parties

Cases Cited (1)