James Hird was on the losing end of a Supreme Court of Victoria proceeding against Chubb Insurance Company of Australia Ltd this week, where he sought indemnification of legal costs (of around $692,000) under a D&O liability policy. The costs in question were in connection with Hird’s unsuccessful 2014 Federal Court challenge (at both trial and appeal) to the power of the Australian Sports Anti-Doping Authority’s (ASADA) to conduct a joint investigation in 2013 with the Australian Football League over the Essendon supplements program. Significantly, he was the plaintiff and then the appellant in offensively ‘tackling’ the regulator and seeking orders restraining it from taking action on the basis of information collected during the investigation.

Hird claimed that he was an Insured Person under the policy (which was not disputed) and was entitled to have his costs (which had not been indemnified by Essendon) paid by Chubb pursuant to the terms of the policy. The Court rejected this and found that Hird had failed to establish a right to indemnification under the policy. The judgment helpfully summarises and applies well-established principles of contract/policy interpretation. One of the key findings made was that neither the interview notice issued to Hird, nor the joint investigation of which it formed part, was a demand or formal proceeding against Hird for a Wrongful Act. It was also held the definition of Legal Representation Expenses in the policy meant reasonable Defence Costs (not costs incurred in relation to administrative and regulatory processes that could lead to adverse outcomes, as more broadly contended by Hird).

Whilst the decision considered some scenarios where the costs of offensive action by an insured under a D&O policy may be covered, Hird’s case was not one of them. Hird’s motive for offensive action against ASADA was fear of damage to his reputation and economic interests. This motive did not establish the necessary causal link under the policy between his participation in the joint investigation and his decision to commence the Federal Court proceeding.

An important aspect of this case in practice, is that many insureds want to ‘take on the regulator’ and seek orders restraining the regulator from taking action against them. If successful, arguably such offensive action would save an insurer a considerable amount of defence costs. Insureds often argue ‘I was doing this to save you money’ and therefore the insurer should pay. The problem is that these actions rarely succeed and greatly escalate the risk. As such, insurers typically write policies to only cover the cost of defending the allegations, not trying to stop them altogether.

Hird v Chubb Insurance Company of Australia Ltd [2016] VSC 174 (3 May 2016)