Silbermann, Greaves,Rich v CGU Insurance Limited

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50141/01 SILBERMANN v CGU INSURANCE LIMITED 50096/02 GREAVES v CGU INSURANCE LIMITED 50150/02 RICH v CGU INSURANCE LIMITED JUDGMENT 1 HIS HONOUR: The plaintiffs, who are former directors of One.Tel Limited, (One.Tel) which is in liquidation, have brought proceedings against CGU Insurance Limited (CGU) claiming an indemnity for the costs of defending themselves in proceedings brought against each of them by the Australian Securities and Investment Commission (ASIC). CGU have filed a defence in each of the proceedings. The plaintiffs, by motion, sought to strike certain paragraphs from that defence. That motion was dismissed. 2 The plaintiffs then brought an application seeking separate determination of three questions, being essentially the questions raised in the strike out motion. That application was granted and in their final form, the following questions are before the court for determination:

1. Whether, on the true construction of Directors & Officers Liability Insurance Policy No 01 DO 0298798 ("the Policy"), issued by the Defendant absent an existing judgment, order or other final adjudication adverse to the Plaintiff, the Defendant can rely on Exclusion Clause 3.1 in answer to the Plaintiff's claim for indemnity under the Policy;

2. whether, on the true construction of the Policy issued by the Defendant the Defendant itself is entitled to seek a judgment, order or other final adjudication adverse to the Plaintiff and, thereby, exclude liability for a claim under clause 3.1 of the Policy in the same proceedings in which the Plaintiff makes a claim for indemnity against the Defendant.

3. Whether, on the true construction of the Policy issued by the Defendant, exclusion clause 3.1 of the Policy operates to exclude liability on the part of the Defendant to pay claims by the Plaintiff for indemnity for Defence Costs under

(i) clause 2.1 of the Policy; (ii) Clause 2.6 of the Policy; (iii) Insuring Agreement A of the Policy; and (iv) Insuring Agreement B of the Policy. 3 It is agreed that the questions are to be determined upon the assumption that the allegations pleaded by CGU against the plaintiffs in its defence are true. Those allegations include both dishonest and fraudulent conduct in the discharge by the plaintiffs of their relevant functions as directors of One.Tel. CGU seeks a judgment or final adjudication adverse to each plaintiff in these proceedings in relation to that conduct. It also submits that the relevant exclusion clause in the policy of insurance operates to deny the plaintiffs' claims. The relevant provisions of the policy 4 The policy is a Directors and Officers Liability Insurance Policy. It provides in Section 1, under Directors and Officers Liability Insuring Agreement A, that CGU will pay: "Any Loss for which the Directors and Officers may not be legally indemnified by (One Tel) arising out of any Claim, by reason of any Wrongful Act committed by them in their capacity as a Director or Officer." 5 Provision is also made for indemnity for the corporation in Insuring Agreement B, which is in the following terms: "The Insurer will pay on behalf of the Corporation any loss payment which it is legally permitted to make arising out of any Claim, by reason of any Wrongful Act, committed by any Director or Officer in their capacity as a Director or Officer, first made against the Director or Officer during the Period of Insurance and notified to the Insurer during the Indemnity Period. The total amount payable in respect of all Claims under Insuring Agreement A and/or Insuring Agreement B of this Policy shall not in the aggregate exceed the limit of aggregate liability as stated in Item 5 of the schedule." 6 "Wrongful Act" is defined in cl 5.15 and means: "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." 7 "Loss" is also defined in cl 5.8. It includes any amount payable in respect of a "Claim" and includes "Defence Costs". The definition is as follows: "'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." 8 The essence of the definition of Defence Costs is that they are the costs of "defending, investigating, attending or monitoring any Claim". The full definition is: "5.3 Defence Costs

all reasonable costs, charges and expenses (other than regular or overtime wages, salaries or fees of any Director of 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." 9 The ASIC proceedings constitute a "Claim"which is defined as follows: "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." 10 Section 2 of the policy includes various "Extensions". Clause 2.1 provides for the advancement of Defence Costs in the event that a Claim on the Policy is made. If CGU has granted indemnity, it must meet the Defence Costs as they are incurred. If CGU has not confirmed indemnity and elects not to take over the defence of a claim, it may, "in its discretion, pay Defence Costs as they are incurred and prior to the finalisation of the Claim." In the event that the insurer has paid costs under this provision, it may recover them if it is subsequently established that the Directors were not entitled to the costs, which have been advanced. 11 Clause 2.1 is in the following terms: "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 Provision is also made for the costs of attending Official Investigation or Inquiries. Clause 2.6 is in the following terms: "2.6 Attendance at Official Investigations or Inquiries The Insurer will pay Defence Costs incurred with its prior written consent by or on behalf of a Director or Officer in attending any official investigation, examination, inquiry or other proceedings ordered or commissioned by any official body or institution, where a Director or Officer is legally compelled by such body or institution to attend such investigation, examination, inquiry or proceeding and which involves an allegation of a Wrongful Act against a Director or Officer which is the subject of indemnity under this Policy." 13 In the present case, because One.Tel is in liquidation, cl 2.11 of the policy has come into operation and CGU may, but for the operation of the exclusion clause, be obliged to indemnify the Directors. However, CGU has not confirmed indemnity, has not taken over the defence of any plaintiff and has refused to pay any of the Defence Costs. 14 CGU has adopted this position relying upon Section 3 of the Policy which provides various exclusions. Clause 3.1 is the source of the present difficulties and provides: "This Policy does not provide an indemnity against any Claim made against any Director or Officer: 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 judgment or other final adjudication adverse to the Director or Officer." The pleadings 15 Although there are some differences between the pleadings in each of the proceedings, they are not material for present purposes. The summons filed by the plaintiffs in each matter seeks a declaration that CGU is obliged to indemnify the plaintiffs in respect of their costs in defending the ASIC proceedings and in appearing in other proceedings, including the investigation conducted by ASIC and the liquidator's examination in the Federal Court. Orders are sought to the same effect. 16 CGU has filed a defence in each proceeding alleging statutory breaches and dishonest and fraudulent conduct by each plaintiff. It submits that the exclusion in cl 3.1 operates with the effect that it is not required to provide indemnity for the plaintiffs' Defence Costs. The submissions of the plaintiffs The first question 17 The plaintiffs submit that the exclusion is confined by the last paragraph of cl 3.1 to the circumstance where a relevant judgment or final adjudication has been made. Until this occurs, it is submitted the plaintiffs are entitled to indemnity. It is submitted that the use of the past tense "has been established" is critical. 18 The plaintiffs submit that the clause is not ambiguous, but if the court finds otherwise, the ambiguity should be resolved in favour of the insured. 19 CGU has the onus of establishing that the clause has application. See: Munro Brice & Co v War Risks Association Ltd [1918] 2 KB 78; Legal & General Insurance Australia Limited v Eather (1986) 6 NSWLR 390; Toikan International Insurance Broking Pty Limited v Plasteel Windows Australia Pty Limited (1989) 15 NSWLR 641. 20 It is submitted that an exclusion, such as cl 3.1, is to be read subject to the well established general rule of construction that it is to be construed "according to its natural and ordinary meaning, read in light of the contract as a whole, thereby giving due weight to the context in which the clause appears, including the nature and object of the contract, and where appropriate, construing the clause contra proferentem in the case of ambiguity": Provincial Insurance Australia Pty Limited v Consolidated Wood Products Pty Limited (1991) 25 NSWLR 541, citing Darlington Futures Limited v Delco Australia Pty Limited (1986) 161 CLR 500 at 510; see also Transfield Pty Ltd v National Vulcan Engineering Insurance Group Ltd [2002] NSWSC 830, para 33 and 59. 21 The plaintiffs submit that the first question should be answered "no". The second question 22 The plaintiffs submit that if the answer to the first question is "no", the answer to the second question must also be "no". It is submitted that the requirement for an existing judgment or adjudication, is a requirement for a judgment or adjudication, other than the one the defendant seeks in the indemnity proceedings. 23 If the answer to the first question is "yes", the plaintiffs submit that the issue becomes whether CGU may seek relevant findings in the indemnity proceedings. In this respect, it is submitted that the contract of insurance must be read as a whole and includes an implied term that obliges CGU to act in good faith in respect of any matter arising under the policy: s 13 of the Insurance Contracts Act 1984 (the Act). See also s 14 of the Act. This sets the context for determining whether the "judgment or other final adjudication" referred to in cl 3.1 may be one obtained by CGU in the indemnity proceedings. 24 It is submitted that because the requirement for there to be such a judgment is intended to be a protection for the insured, it is not enough to deny indemnity that a third party alleges the requisite conduct. Nor is it enough that the insurer alleges the requisite conduct. The intent of cl 3.1 is to prevent indemnity being denied by CGU unless there exists a relevant judgment or determination. 25 It is accepted by the plaintiff that it is commonplace for insurers to plead reliance upon exclusion clauses and to attempt to make good that position in indemnity proceedings. It is submitted that there is no breach of any duty of good faith in so doing in the ordinary case because the parties are free, once in dispute, to act reasonably in the pursuit of their own interests. Significantly, the facts attracting the exclusion clause are existing facts that the insurer has had no control over. 26 However, the plaintiffs submit that in the present case, CGU is seeking to breach its duty because it is seeking to establish - as against its insured - a fact necessary for the attraction of the exclusion clause, namely, a judgment, which would not exist but for the conduct of the insurer. 27 Reading the contract of insurance as a whole, seeking to give a practical measure of protection to an insured and bearing in mind CGU's obligations to act in good faith, the "judgment or other final adjudication" must mean one obtained by a person other than the defendant. It cannot therefore, be a judgment obtained in these proceedings. 28 It is submitted that the answer to the second question ought to be "no". The third question 29 The plaintiffs identify the fact that the policy provides for indemnity against two discrete types of liability being

(a) for "Claims" - namely for demands by third parties alleging a Wrongful Act (clause 5.1); and

(b) for "Defence Costs" - namely a liability to the insured's own solicitor (clause 5.3) 30 It is submitted that because the plaintiffs are only seeking indemnity for Defence Costs - and not Claims - the exclusion in cl 3.1 which refers in its opening words to "any Claim", does not apply. "Claim" is a defined expression. It is the claim made against a director or officer by a third party. Accordingly, the quality of the insured's conduct, and any finding in relation to it, is irrelevant to the operation of cl 3.1. 31 It is submitted that the language of cl 3.1 should be contrasted with the obligation of the defendant in Insuring Agreement A. It is suggested that the exclusions in Section 3 are differently expressed and narrower in scope than the indemnity. 32 It is submitted that if cl 3.1 had been intended to exclude any indemnity, the words chosen would have corresponded with the insuring agreements. The introductory wording of Section 3 would have read: "This policy does not provide an indemnity in respect of any Loss arising out of a Claim made against any Director or Officer." 33 Instead, the wording excludes only "an indemnity against any claim." Prima facie, the change in wording between the insuring agreements and the exclusions signifies a difference in meaning. 34 Finally, it is suggested that the draftsmen thought that CGU was sufficiently protected in respect of Defence Costs without requiring that the exclusion extend to include them. Such costs were recoverable either under the Insuring Agreements (because of the definition of 'Loss') or under clauses 2.1 and 2.6. Each of these obliged CGU only to meet costs if it consented. Of course, in deciding whether to meet costs CGU would be obliged to act reasonably. The requirement for consent, however, affords a measure of protection that explains why Defence Costs have not been dealt with in Clause 3.1 35 The plaintiffs submit that the third preliminary question should be answered:

(i) "No" (ii) "No" (iii) "No" (iv) "No" The submissions of CGU The first question 36 CGU submits that this question should be answered "yes". The essence of the submission is :

(a) clause 3.1 contains no reference to a judgment or other final adjudication in prior proceedings or other proceedings.

(b) clause 3.1 assumes that the policy is in operation and provides an exclusion to the insurers obligation where certain conduct is established. Although the exclusion only takes effect when a relevant finding is made, the insurer is entitled to decline indemnity and argue that such a finding should be made.

(c) unless the insurer can put the insured's conduct in issue in the indemnity proceedings its liability to pay may be determined in proceedings to which it is not a party. It is commonsense that a third party seeking recovery against an insured will not plead fraud or dishonesty (if that is possible) for it is likely to trigger exclusion clauses and may deny the third party access to the insurance fund. The parties to the insurance policy could not have intended that indemnity would depend upon the conduct of a stranger to the policy. See VACC Insurance Co Ltd v BP Australia Ltd (1999) 47 NSWLR 716 at 724 and State of New South Wales v AXA Insurance Australia Ltd (2002) 54 NSWLR 409 at 415.

(d) the words "has been established" do not import a concept of "prior or other" proceedings. The ongoing nature of a dispute as to indemnity, which is the context of cl 3.1, requires the clause to be given a contemporary meaning.

(e) The work of the proviso is to set a qualitative or substantive measure to the cl 3.1(1) conduct. The proviso sets as the required standard for the operation of the clause conduct which has been established by a judgment or other final adjudication. The proviso sets, in effect, a level or standard of proof. A prior or past or pre-existing proceeding may establish that standard, but that is not essential. The standard must be met, but that is not the same as saying that it must be met in antecedent proceedings. It may be established in the disputed indemnity proceedings. It is submitted that it would need clear words, which are entirely absent, to produce the contrary result.

(f) The construction advanced by the plaintiffs is contrary to the "fundamental principle of all insurance law that the insured is debarred by an implied term from recovering on the policy if he intentionally caused the loss or event upon which the insurance moneys were expressed to be payable". Fire & All Risk Insurance Co Ltd v Powell (1966) VR 513 at 517. CGU emphasises the fact that in this hearing, the plaintiffs accept that the questions "should be decided upon the assumption that the matters pleaded against each plaintiff are true" Silbermann & Ors v CGU Insurance Ltd [2002] NSWSC 1091 at para 7. On that basis, it is submitted that the payment pursuant to the policy is "brought about by, contributed to by or which involves" the relevant cl 3.1(1) conduct and the construction advanced by the plaintiffs is contrary to and undermines that fundamental principle. A construction, which subverts public policy, ought not readily be adopted. Question two 37 CGU submits that this question should also be answered "yes". The essence of its submission is:

(a) there is no proper basis to construe cl 3.1 as being confined to circumstances where the exception can only be established by other parties and in other proceedings.

(b) the context of cl 3.1 is the relationship between the insurer and the insured. Other proceedings may not be concerned with or depend upon matters in respect of which a relevant finding would trigger the exclusion. As a consequence, if the question was answered "no", CGU may be precluded from ever being able to prove that conduct of the character falling within the exclusion has occurred.

(c) there are no words of pre-condition, preclusion, restriction of entitlement or entitlement per se in cl 3.1 which justifies or requires the construction advanced by the plaintiffs. Question three 38 CGU submits this question should be answered "yes" as to each limb. Its submission has the following elements:

(a) the defendant's obligation to indemnify derives from the two "Operative Clauses" in Section 1 of the Policy. Section 1 of the Policy contains those two clauses in the form of the "Directors and Officers Liability Insuring Agreement A" and the "Corporate Reimbursement Insuring Agreement B". The general scheme of those two clauses is that if the corporation is "legally permitted" to make payment for a "Claim, by reason of any Wrongful Act" in respect of a director and officer, CGU will make that payment on behalf of the corporation. Where the director or officer is not entitled to "be legally indemnified by the Corporation" for any "Loss" "arising out of any Claim, by reason of any Wrongful Act", CGU will make that payment on behalf of the director or officer.

(b) Because, for the purpose of this hearing, the cl 3.1(1) conduct is accepted to be true, the corporation is not legally permitted to indemnify the plaintiffs. Accordingly, the indemnity pursuant to the policy is the obligation to pay pursuant to Insurance Agreement A. That obligation is to pay any "Loss" which includes "Defence Costs".

(f) However, the obligation to pay pursuant to Insuring Agreement A is subject to cl 3.1. Clause 3.1 of the policy does not contain, nor does any other clause in Section 3 contain, any provision precluding the operation of cl 3.1 in respect of "Defence Costs" generally or, if operative, payments made pursuant to Section 2 of the Policy. Decision 39 It is necessary to bear in mind the general rule that exclusion clauses in insurance policies should be construed against the insurer (Sutton Insurance Law in Australia 3rd ed 1999 para 9.97). The position was emphasised by Palmer J in Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd & Anor [2002] NSWSC 1006, in particular: "That principle is merely an application of the established doctrine that policies of insurance are to be construed 'contra proferentem': the Courts set their face against an insurer who, having drafted the terms of the policy which are imposed on the insured and having received premiums under that policy, possibly for years, then insists on construing an ambiguity in the terms in such a way as to deny liability. There are many strong judicial statements to this effect: see eg per Farwell LJ in In re Etherington & Lancashire & Yorkshire Accident Insurance Co [1909] 1 KB 591, at 600; Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14, at 22 per Isaacs J; Halford v Price (1960) 105 CLR 23, at 34 per Fullagar J." 40 However, I have formed the view that there is no need to resort to that rule in the present case. The exclusion provided by cl 3.1 operates to confine CGU's obligation under the policy. Without the exclusion, the obligation is to indemnify the Director or Officer with respect to any relevant "Loss". That "Loss" will include any "Defence Costs". 41 "Defence Costs" are one of the amounts payable "in respect of a Claim". Although a "Claim" may involve a claim or demand for a money sum, including by way of a fine or penalty, this is not necessarily the case. This follows from the fact that the definition of "Wrongful Act" is very broad and the obligation of the Director or Officer may be confined to the cost of defending against the relevant allegation. 42 However, if a "Claim" is defended this is likely to give rise to "Defence Costs". If this is the case the Director or Officer is entitled to indemnity for those costs being a "Loss" arising out of a "Claim". Indemnity "against that "Claim"," within the meaning of Section 3 of the Policy, includes the relevant "Defence Costs" associated with it. 43 Accordingly, the exclusion in cl 3.1 has effect, both in relation to any determination which gives rise to an obligation to make a payment pursuant to a "Claim" and any "Defence Costs" associated with the "Claim". 44 The primary obligations of CGU are provided in Section 1 of the Policy. Section 2 provides the Extensions which are "subject to all the terms and conditions of this Policy". Accordingly, cl 3.1 applies to cl 2.1 and cl 2.6. 45 In my opinion, the final paragraph of cl 3.1 does not exclude CGU from both pleading the exclusion in the present proceedings and doing so without a relevant finding having been made in other proceedings. There are a variety of circumstances in which adverse findings may be made in relation to the conduct of a Director or Officer including, a Royal Commission, an official investigation or other similar proceedings. Without the final paragraph of cl 3.1, it could be argued that an adverse finding in those proceedings, which could not constitute a final judgment, would be sufficient to allow CGU to deny indemnity. 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. 46 However, there is nothing in the clause to suggest that the exclusion should be confined to a finding in proceedings other than the indemnity proceedings. The rights of the parties to a policy of insurance often have to be determined by a court. In such proceedings, either party is able to advance its position and assert that the objective facts entitle the insured to indemnity or otherwise. This does not involve any lack of "good faith" by either party. The court will determine the parties' rights having regard to the evidence which the parties tender at the trial and the findings which it makes. 47 I do not believe cl 3.1 should be construed in a manner which requires a different outcome in the present circumstances. It would be extraordinary if a policy of insurance provided indemnity in circumstances where the conduct which gave rise to the claim was dishonest or fraudulent. Without clear words, such a construction of the policy should not be accepted. 48 Accordingly, I answer the questions as follows:

1. Yes 2. Yes 3(i) Yes 3(ii) Yes 3(iii) Yes 3(iv) Yes 49 The parties may address me in relation to costs including the costs of the Notice of Motion. **********

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