In the recent case of Ransley v Chubb Insurance Company of Australia Ltd, the New South Wales Supreme Court applied general contractual principles of construction and interpretation when considering whether legal expenses arising from a formal investigation were covered under a directors' and officers' insurance policy.
The plaintiff, Craig Ransley, a former director of Doyles Creek Mining Pty (DCM), gave evidence at a public enquiry by the Independent Commission Against Corruption (ICAC) in Australia, concerning investigations into the illegal procurement of lucrative mining licences from the state government. These investigations ultimately found that the plaintiff and other directors of DCM had acted wrongly.
The directors and officers of DCM were insured by the defendant, Chubb, pursuant to a D&O policy which covered certain legal costs in relation to investigations and legal claims. The plaintiff sought a declaration that Chubb was liable to indemnify him in respect of his legal costs incurred in the investigation in the sum of $2,000,000. Chubb accepted liability to indemnify the insured for the investigation costs, but argued that the maximum aggregate limit for all costs regarding the investigation was $2,000,000 of which it had already paid $1,248,377.83, leaving a balance of $751,622.17 to meet all outstanding claims, including the plaintiff's claim.
The dispute principally focused on the interplay of the following clauses:
- the insuring clause in the policy (clause 1D), which provided that Chubb "shall pay, on behalf of each Insured Person, Legal Representation Expenses on account of any Formal Investigation";
- the definition of "Loss", being "the amount which an Insured becomes legally obligated to pay on account of any covered Claim including but not limited to (a) Defence Costs; (b) Legal Representation Expenses…"; and
- the Limit of Liability and Deductible (clause 7), which provided that "The Company’s maximum liability for Loss on account of each Claim, whether covered under one or more Insuring Clauses, shall not exceed the limit of liability for each Loss set forth in item 2(a) of the Schedule….”
The plaintiff argued that the word "Loss" in the first sentence of clause 7 meant the legal representation expenses that an insured is legally bound to pay on account of any Claim. In other words, the clause should read “maximum liability for legal representation costs, incurred by an Insured is the amount set forth in item 2(a) of the Schedule". This interpretation, he argued, would be consistent with the main insuring clause (clause 1D) in the D&O section of the policy, which provided cover for each insured person.
If the plaintiff had succeeded with his argument, the insurance policy would have been construed as providing individual extended cover up to $2,000,000 per insured person.
However, the Supreme Court, in finding for the defendant (Chubb) was of the view that the emphasis should not be on the word "Loss"’ in clause 7 in insolation but read in its entire context namely; "The Company’s maximum liability for Loss on account of each Claim". The Court held "the word 'Loss'…is an abstract noun used to describe the nature of the loss covered by the policy in general. The loss with which the sentence is concerned is made specific by the following words, 'on account of each Claim.' Those words are essential to enable the limit stated in the sentence to operate."
Consequently the correct construction of the clause, as argued by the defendant, was that the extended cover provided indemnity up to $2,000,000 for all the costs resulting from the investigations and not for each individual investigation affecting a director or officer.
The court noted that its interpretation of the policy wording made commercial sense – the policy was intended to cover loss arising from "Wrongful Acts" as well as legal costs incurred in connection with formal investigations. The purpose behind offering an extended cover for D&O claims, was to some extent, to ring-fence the cost of investigations without exhausting the aggregate limit of indemnity available to protect directors’ and officers’ personal liability for wrongdoings to the company and/or to third parties.
This case highlights the importance of using clear, unambiguous wording in insurance policies and the need for extra care when seeking to apply various limits and deductibles to different sections of the policy.