The Supreme Court of Victoria recently dismissed James Hird's bid to recover the legal costs associated with his court challenges against the Australian Sports Anti-Doping Authority (ASADA) from Essendon's D&O insurer, Chubb.
In June 2014, Hird commenced proceedings in the Federal Court seeking declarations that ASADA acted beyond its powers in joining with the AFL in its investigation into the Essendon supplements saga, and to restrain the anti-doping body from taking action against him and the Essendon players. Those proceedings were dismissed, as was the subsequent appeal. Facing a hefty legal bill in excess of $500,000, Hird then took action against Chubb after it refused to indemnify his costs under Essendon’s D&O policy, which covered him as an "Essendon Executive".
Like many directors and officers, Hird considered that his costs ought to have been indemnified by Chubb as the challenges, if successful, would have stemmed the flow of litigation and the legal costs Chubb would ultimately need to indemnify. However, as this case shows, “the devil is in the detail” of the policy.
In summary, the Supreme Court said that Hird’s challenges were not in the nature of an action for a “wrongful act”. This is because ASADA had made no specific allegations against him at that time. Although it had compelled him to attend an interview and disclose documents for the investigation, this was part of a mere inquiry into whether a wrongful act may have been committed.
The Supreme Court also found that Hird’s own involvement in ASADA’s investigation and his broad challenge to the validity of ASADA’s actions were not legal costs incurred on account of defending, investigating or appealing a formal investigation within the meaning of the policy. This was supported by his oral evidence that the court action was not “defensive,” but motivated by a desire to protect his reputation and position as coach of Essendon.
The decision serves as a timely reminder for directors and officers to review their D&O policies and ensure that they understand the scope of the cover in fact provided. Directors and officers should also be aware of the limitations that are imposed on corporations releasing or directly indemnifying them in respect of certain acts or omissions arising out of s.199A of the Corporations Act 2001 (Cth).
The following questions arise for consideration by people considering D&O insurance:
- Who exactly is covered by the policy?
- What types of liabilities are covered?
- What is excluded? Note: It is doubtful whether penalties and fines for criminal conduct can lawfully be insured.
- Does it sufficiently cover the areas of concern?