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[2005] HCA 17
appellant. Appeal allowed with costs. Order 2 of the Supreme Court orders made 18 November 2003 set aside and in lieu thereof the separate question is answered 'No'. Respondents to pay the costs of and...
4 cited instruments linked from this judgment.
A former insurance executive facing criminal charges for allegedly misleading auditors sought immediate payment of his legal defence costs under a directors and officers policy. The insurer tried to refuse by pointing to the clause excluding cover for dishonest or criminal acts. The High Court ruled that the exclusion only bites once the insured admits the conduct or a court formally decides it happened. Until then the insurer had to pay the defence costs as they arose (with a right to claw them back later if the exclusion ultimately applied). The Court emphasised that policies must be read sensibly as a whole and that an anticipatory refusal does not satisfy the policy wording.
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2,909 words · generated 24/04/2026
Daniel Wilkie, an executive officer and employee of FAI Insurance Limited and its subsidiaries during the relevant period, became the subject of criminal proceedings commenced by the Australian Securities and Investments Commission (ASIC) on 29 May 2003. The charges, brought in the Local Court at Sydney, alleged offences under ss 1309(1), 1311(1), 232(2) and 1317FA of the Corporations Act 2001 (Cth) and the Corporations Law (as continued by s 1401). In substance ASIC asserted that between March and September 1998 Wilkie had permitted misleading information to be given to FAI's auditor and had knowingly failed to act honestly in the discharge of his duties with intent to deceive those auditors. These allegations followed adverse findings made about FAI's affairs in a Royal Commission.
Wilkie notified a claim under the Directors & Officers/Company Reimbursement Policy dated 23 February 2000 (the Policy), which had a $20 million limit, a Period of Insurance running from 31 May 1999 to 31 May 2006, and expressly chose the law of the Commonwealth and New South Wales. The claim was not brought under the primary insuring clause (Insuring Clause A) but under Automatic Extension 9 headed "ADVANCE PAYMENT OF DEFENCE COSTS". That extension obliged GIO (defined to include the present respondents, Gordian Runoff Limited (formerly GIO Insurance Limited) for 60 per cent and the RE Brown Syndicate at Lloyd's for 40 per cent) to pay reasonable Defence Costs as and when incurred if GIO elected not to take over the defence and provided two conditions were met: first, that GIO had not denied indemnity for the Claim, and second, that prior written consent (not to be unreasonably withheld) had been obtained.
After receiving the brief of evidence, the respondents' solicitors wrote on 25 September 2003 stating that their clients "deny indemnity for the claim pursuant to the terms of Exclusion 7 of the Policy". Exclusion 7 excluded cover for Loss arising out of any Claim based upon, attributable to or in consequence of any dishonest, fraudulent, criminal or malicious act or omission or deliberate breach of statute where such act "has in fact occurred". The concluding paragraph of the Exclusions section defined "in fact" for the purposes of Exclusions 5, 6 and 7 as meaning the conduct "is admitted by the Insured or is subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator". Wilkie had made no admission and no adjudication had taken place.
Wilkie commenced proceedings in the Equity Division seeking a declaration that the respondents could not rely on Exclusion 7 to deny indemnity under Extension 9 and a mandatory order for payment of Defence Costs as incurred, subject to a right of recovery if it were later established that he was not entitled to indemnity. Nicholas J ordered the determination of a separate question framed in terms that incorporated the factual circumstances (no admission, no adjudication, denial letter relying solely on Exclusion 7, no allegation of bad faith). On 18 November 2003 his Honour answered the question "Yes", holding that the respondents were entitled to decline indemnity. That answer was reached by applying reasoning from the New South Wales Court of Appeal in Silbermann v CGU Insurance Ltd (2003) 57 NSWLR 469.
The High Court granted special leave to appeal directly from that decision. The appeal was heard with related matters but the Court ultimately treated the present appeal as raising distinct issues of policy construction. By majority (Gleeson CJ, McHugh, Gummow, Kirby and Callinan JJ) the Court allowed the appeal with costs on 7 April 2005, set aside the Supreme Court's order answering the question "Yes", substituted an answer "No", and ordered the respondents to pay the costs of the separate question below.
The joint judgment (Gleeson CJ, McHugh, Gummow and Kirby JJ) began from the orthodox proposition that a commercial contract of insurance must be given a businesslike interpretation, paying attention to language, commercial circumstances and the objects the Policy was intended to secure ([13]). Preference was given to a construction that supplies congruent operation to all components of the instrument ([14]).
The Court observed that Insuring Clause A, the definitions of "Claim", "Wrongful Act", "Loss" and "Defence Costs", and the various exclusions were all drafted on the footing that a "Claim" is constituted by allegations, whereas "Loss" crystallises only when a legal obligation to pay arises. Defence Costs fall within "Loss" but are payable only after they are "incurred" and with prior consent. The primary indemnity is therefore of limited immediate utility to an insured facing ongoing criminal proceedings who needs funds to prepare a defence before any verdict.
Extension 9 supplies that immediate utility. It creates a distinct obligation to pay reasonable Defence Costs as and when incurred, subject only to the two provisos. The critical proviso is (i): "GIO has not denied indemnity for the Claim". The respondents argued that their letter of 25 September 2003 satisfied this language because it expressly denied indemnity "pursuant to the terms of Exclusion 7".
The Court held that this could not be so. Exclusion 7 is not engaged unless the conduct "has in fact occurred" within the defined meaning. That definition requires either an admission or an adjudication. Neither had happened. A Royal Commission report does not constitute adjudication for this purpose. Therefore no legal ground for denying indemnity yet existed. The letter amounted to no more than a statement that indemnity would be refused if and when the exclusion became available. Such a statement is not a "denial of indemnity for the Claim" within the meaning of Extension 9's proviso (i) ([25]-[29]).
The Court emphasised the lack of congruence that would arise if the respondents' construction were accepted. The phrase "subsequently established" appears in both the definition of "in fact" and in the recovery paragraph at the foot of Extension 9. If an anticipatory denial could immediately disengage the advance-payment obligation, the recovery right would be deprived of much of its work. A harmonious reading requires that the exclusion operate only when its factual precondition is satisfied, leaving the advance-payment obligation on foot in the meantime, with the insurer protected by the express right to recover sums paid if the exclusion is later established by judgment or final adjudication ([30]-[31]).
Callinan J added that the contra proferentem rule retained vitality even for sophisticated insureds and that the respondents could have drafted a clearer clause postponing all payment of defence costs until after verdict had they wished to do so. The commercial purpose of D&O cover—to give an insured facing serious allegations the practical means of mounting a defence—would be undermined if the insurer could become, in effect, the final arbiter by the simple expedient of an early letter of denial ([37]-[40]).
The result was that the separate question had to be answered "No". The respondents were not free of obligation under Extension 9 on the basis they had asserted.
Prior to Wilkie the law on dishonesty exclusions in Australian D&O policies was unsettled at intermediate appellate level. Nicholas J had regarded the New South Wales Court of Appeal's reasoning in Silbermann v CGU Insurance Ltd (2003) 57 NSWLR 469 as directly applicable. That decision had dealt with similar but not identical wording and had permitted an insurer to decline indemnity on the basis of an exclusion before final adjudication. The High Court noted that distinct issues arose in the Silbermann and Rich appeals heard concurrently, and ultimately distinguished the Court of Appeal's approach rather than following it ([11]).
The joint judgment drew on established principles of contractual construction from McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 (businesslike interpretation) and Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 (preference for congruent operation of all parts of an instrument). It also referred to Andar Transport Pty Ltd v Brambles Ltd (2004) 78 ALJR 907 on the continuing role of contra proferentem in indemnity and insurance contexts, although counsel for Wilkie had not ultimately relied on that maxim given the sophistication of the parties.
The decision therefore marked a clear statement at the highest level that "in fact" language in dishonesty exclusions operates as a temporal and evidentiary precondition. An insurer cannot rely on such an exclusion to refuse advance defence costs unless and until the insured admits the conduct or a court, tribunal or arbitrator adjudicates that it occurred. The existence of a recovery right in Extension 9 was treated as an important textual indication that the policy contemplated payment in the interim.
After Wilkie the law in Australia has treated the decision as settling the construction of materially identical "in fact" definitions. The requirement for admission or adjudication is now understood to prevent anticipatory reliance on dishonesty exclusions for the purpose of denying or delaying defence-cost funding. The decision has reinforced the commercial utility of automatic extensions for advance payment of defence costs in D&O programmes, particularly in the regulatory and criminal context where final adjudication may be years away.
Paragraph [23] contains the definitional language at the heart of the case:
"For the purposes of Exclusions 5, 6 and 7, the words 'in fact' shall mean that the conduct referred to in those Exclusions is admitted by the Insured or is subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator."
Plain-English translation: The policy writers have spelled out that the insurer cannot treat someone as dishonest for exclusion purposes until the insured actually confesses or a judge, tribunal or arbitrator decides, after a proper hearing, that the dishonest conduct really happened. This stops the insurer from guessing or assuming.
Paragraph [26]:
"The efficacy in law of the purported denial based upon Exclusion 7 must be open to challenge in either case. The fact having legal consequences upon which stipulation (i) operates, is a denial of indemnity for the Claim which is then effective in the terms of the assigned ground of denial."
Plain-English translation: When the insurer writes a letter saying "we deny cover because of the dishonesty exclusion", a court can still test whether that denial is legally valid. If the exclusion is not yet legally available (because there has been no admission or judgment), the letter does not count as a valid denial that can stop the advance-payment obligation.
Paragraph [29]:
"Where, by hypothesis, there has been no such finding, a necessary element of the exclusion is missing. In those circumstances, there is as yet no ground to which GIO can point as a legal basis for a denial of indemnity. The denial of indemnity of which Extension 9 speaks is a refusal of indemnity on a ground for refusal provided by the Policy, not a statement which foreshadows that indemnity will be refused if and when a ground for refusal becomes available."
Plain-English translation: Until a court has actually convicted or otherwise adjudged the conduct, the exclusion simply does not apply. The insurer cannot use a "wait and see" letter to block immediate payment of legal bills. The policy requires a real, present ground for refusal, not a prediction.
Paragraph [33]:
"It would require clearer exclusionary language than appears to deprive the Insured of the benefit of the Policy for which the premium has been paid."
Plain-English translation: If the insurer wanted to be able to sit back and refuse to pay any legal costs until after the criminal trial, it should have said so in plain words. The words it actually used do not achieve that result, especially when the insured has already paid a premium for defence-cost protection.
These passages together form the analytical spine of the judgment and have been cited repeatedly in subsequent insurance litigation.
Wilkie is triggered whenever three elements coincide. First, the claim must be one that falls within the definition of "Claim", particularly paragraph (iii) of that definition—criminal proceedings commenced by summons or charge alleging a Wrongful Act. Regulatory or criminal investigations that have not yet crystallised into a formal charge will not engage the extension in the same way.
Second, the insured must be seeking to invoke an advance-payment extension (whether automatic or optional) that is conditioned on the insurer not having "denied indemnity for the Claim". The policy wording must contain a definition of "in fact" (or equivalent) that ties the dishonesty, fraud, criminal or malicious conduct exclusion to admission or post-adjudication establishment.
Third, at the time the request for funding is made, the insured must not have admitted the conduct and there must have been no relevant adjudication. A mere assertion by the insurer, even if made in good faith and supported by a Royal Commission report or voluminous brief of evidence, is insufficient. The fact pattern in Wilkie itself—criminal charges under the Corporations Act following a corporate collapse, a letter denying indemnity solely on the dishonesty exclusion, and no admission or verdict—is the paradigm.
The precedent applies with equal force to civil claims where the allegations involve fraud or dishonesty but no final judgment has yet been entered. It does not apply where the policy contains a "final adjudication" clause that is worded differently or where the insurer relies on other exclusions (for example, prior claims, prospectus liability, or United States forum exclusions) that do not contain the "in fact" precondition. It also has no application where the insured has in fact made an admission that satisfies the policy definition.
The High Court's construction has been treated as authoritative on the temporal operation of "in fact" dishonesty exclusions. Intermediate appellate courts and trial judges have accepted that an insurer cannot use such an exclusion to refuse or defer defence-cost funding until the admission or adjudication precondition is satisfied. The decision is routinely cited for the proposition that Extension 9-style clauses and "in fact" exclusions must be read harmoniously so that the recovery right retains utility.
Subsequent decisions have also accepted the businesslike-construction approach mandated by the joint judgment, emphasising that the commercial object of D&O policies is to provide practical assistance with defence costs when an insured is under attack. Courts have declined to read the policy in a way that would make the insurer the de facto arbiter of its own liability before any curial determination.
The distinction drawn between the present Policy and the wording considered in Silbermann has been maintained; lower courts do not treat Silbermann as surviving Wilkie on the point of anticipatory denial. The recovery mechanism in the second paragraph of Extension 9 is now understood to be the insurer's principal protection, not an early letter of denial. Where policies have been redrafted after Wilkie to attempt to achieve a different result, courts have continued to insist on clear language before depriving an insured of the benefit of advance funding for which a premium has been paid.
Because the decision rests on orthodox principles of construction drawn from McCann, Project Blue Sky and Andar, it has been absorbed into the mainstream of Australian insurance law without significant subsequent criticism at appellate level.
Several questions remain live notwithstanding the clarity of Wilkie. First, what constitutes a sufficient "admission" for the purposes of the "in fact" definition? A formal plea of guilty is obvious, but it is less clear whether an admission made in without-prejudice settlement correspondence, or an admission limited to certain factual matters but not legal characterisation, would trigger the exclusion. The Policy in Wilkie did not define "admitted" and the High Court did not need to explore the boundaries.
Second, the precise scope of the recovery right reserved in Extension 9 remains to be fully tested. If the insurer funds millions of dollars in Defence Costs and the insured is later acquitted, can the insurer recover on the basis that the insured "was not entitled to indemnity" for some other reason (for example, failure to provide assistance under Condition 3.4)? The joint judgment noted that the right "may not always be a right of great value" but did not elaborate.
Third, the interaction with the duty of utmost good faith under s 13 of the Insurance Contracts Act 1984 (Cth) was left open. The appellant expressly disavowed any bad-faith allegation. It remains unsettled whether an insurer that asserts an exclusion prematurely, thereby forcing the insured to litigate the coverage point, could be found to have acted contrary to the statutory duty even if the construction argument was reasonably arguable.
Fourth, the decision does not address policies that omit the "in fact" definition or that expressly permit the insurer to form its own opinion on the facts. Whether clearer language of the type the Court said would be required has in fact been achieved in post-Wilkie wordings is a matter for future litigation.
Finally, the position where multiple insureds are involved and only some are alleged to have acted dishonestly remains partially open. Although the "innocent insured" carve-out in the second paragraph of Exclusion 7 was noted, its interaction with joint or several liability for Defence Costs was not the subject of detailed analysis.
These open questions ensure that Wilkie continues to generate advisory work and coverage litigation, particularly in the context of high-stakes regulatory and criminal proceedings against directors and officers. Practitioners must still examine the precise policy language in each case rather than assuming the Wilkie result will automatically follow.
On appeal from the Supreme Court of New South Wales
B W Walker SC with M J Leeming for the appellant (instructed by Speed & Stracey)
M A Pembroke SC with A S Bell for the respondents (instructed by Henry Davis York)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.
Insurance - Professional indemnity insurance - Directors and officers liability insurance policy - Criminal proceedings instituted against appellant insured - Following Royal Commission, appellant alleged to have permitted misleading information to be provided to company auditor - Appellant claimed for advance payment of defence costs under insurance policy - Availability of advance payment of insured's defence costs subject to respondent insurer not denying indemnity for a claim - Respondent purported to deny indemnity relying on exclusion under the policy for losses arising from dishonest, fraudulent, criminal or malicious conduct - Exclusion enlivened only where conduct admitted by the insured or established to have occurred following adjudication by a court, tribunal or arbitrator - Whether respondent had effectively denied indemnity for appellant's claim - Whether stated reliance upon exclusion sufficient to deny indemnity - Whether exclusion engaged in the circumstances.
The [appellant] wrote to the [respondents] and notified a claim ('the ASIC Claim') as described in the affidavit of [the appellant's solicitor] sworn 16 September 2003;
The [respondents] on 25 September 2003 wrote to the [appellant] stating that '[the first respondent] and [the second respondent] deny indemnity for the claim pursuant to the terms of Exclusion 7 of the Policy';
The [appellant] has not admitted that his conduct falls within Exclusion 7;
The conduct referred to in Exclusion 7 has not been 'subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator'; and
The [appellant] does not, for the purposes of the determination of this separate question, allege that the [respondents] acted other than in good faith in writing the letter referred to in paragraph 2 above,
Are the [respondents] free of any obligation to indemnify the [appellant] under [Extension 9] of the Policy when the basis relied upon by the [respondents] in their letter of 25 September 2003 was solely Exclusion 7 of the Policy?"
"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".
"GIO will pay on behalf of the Insured, all Loss arising from any Claim first made against an Insured during the Period of Insurance and notified to GIO during the Period of Insurance by reason of any Wrongful Act PROVIDED THAT the Organisation is not required or permitted to indemnify the Insured for such Loss."
This directs the reader to several of the terms appearing in the section headed "DEFINITIONS". Definition 1 states:
(i) written communication to the Insured or to the Organisation, which alleges a Wrongful Act by the Insured; or
(ii) writ, summons, application or other original legal or arbitral proceedings, cross claim, or counter claim: issued against or served upon the Insured and alleging a Wrongful Act; or
(iii) criminal proceeding commenced by a summons or charge against the Insured alleging a Wrongful Act." (emphasis added)
Each paragraph of this definition fixes upon a written communication or legal process characterised by the allegation therein of a Wrongful Act. It is par (iii) of the definition of "Claim" which is applicable to the present case, but it will be apparent from the balance of the definition that it covers many allegations in civil process of a Wrongful Act where negligence or breach of fiduciary duty, rather than conscious wrongdoing or other dishonesty, is involved.
"Wrongful Act means: any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, or attempted or made (or so alleged) by the Insured in the performance of their duties to the Organisation or any matter claimed against the Insured solely by reason of the Insured serving the Organisation."
The term "Loss" is the subject of Definition 8. This states:
"Loss means: the total amount which the Insured and/or the Organisation becomes legally obligated to pay as a result of a Claim made against the Insured for a Wrongful Act. Loss includes: damages, judgements, settlements, costs and Defence Costs. Loss does not include: fines or penalties imposed by law, punitive or aggravated or exemplary or multiple damages, taxes, or matters uninsurable under the law pursuant to which this policy is construed." (emphasis added)
"Defence Costs means: those costs or charges or expenses, incurred in defending or investigating or monitoring Claims or related appeals. Defence Costs does not include: wages or salaries or fees of the Insured, nor the cost of time spent by the Organisation." (emphasis added)
"without prior written consent from GIO (such consent not to be unreasonably withheld). GIO shall not be liable for any ... Defence Costs to which it has not so consented."
"This policy does not insure Loss arising out of any Claim:
(i) any dishonest, fraudulent, criminal or malicious act or omission; or
(ii) any deliberate breach of any statute, regulation or contract;
where such act, omission or breach has in fact occurred ...
(ii) Exclusions 5, 6 and 7 shall not apply to any Insured who had no direct personal involvement in, or knowledge of, the matters upon which the operation of those Exclusions are based.
For the purposes of Exclusions 5, 6 and 7, the words 'in fact' shall mean that the conduct referred to in those Exclusions is admitted by the Insured or is subsequently established to have occurred following the adjudication of any court, tribunal or arbitrator."
If GIO elects not to take over and conduct the defence or settlement of any Claim, GIO will pay all reasonable Defence Costs associated with that Claim as and when they are incurred PROVIDED THAT:
(i) GIO has not denied indemnity for the Claim; and
(ii) the written consent of GIO is obtained prior to the Insured incurring such Defence Costs (such consent not to be unreasonably withheld).
GIO reserves the right to recover any Defence Costs paid under this extension from the Insured or the Organisation 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 they were not entitled to indemnity under this policy." (emphasis added)
Stipulation (ii) is the counterpart to Condition 3.1, set out above, which also requires prior written consent which is not to be unreasonably withheld. In Extension 9, stipulation (ii) supplies content to the term "reasonable" in the obligation that "GIO will pay ...".
"[This policy does not insure Loss arising out of any Claim] based upon, attributable to, or in consequence of any Insured having gained in fact any personal profit or advantage or receiving any remuneration to which such Insured was not legally entitled".
"[This policy does not insure Loss arising out of any Claim] based upon, attributable to, or in consequence of any Insured having in fact improperly benefited from securities transactions as a result of information that is not available to other purchasers and sellers of such securities". ↑
Wilkie
Gordian Runoff Limited
(1996) 188 CLR 418
(2003) 57 NSWLR 469
(2000) 203 CLR 579
(1998) 194 CLR 355
(2004) 78 ALJR 907
Appeal allowed with costs. Order 2 of the Supreme Court orders made 18 November 2003 set aside and in lieu thereof the separate question is answered 'No'. Respondents to pay the costs of and related to the determination of the question in the Supreme Court.