The recent Victorian Supreme Court decision has provided a useful reminder of the need for careful consideration of the terms of D&O Policies and particularly the cover provided for legal costs. While D&O policies generally cover “reactive costs” in defending a claim, on occasion they may also provide cover for costs incurred in taking proactive steps. Where not a standard inclusion, such cover can be added by endorsement.
In Hird v Chubb Insurance of Australia Ltd  VSC 174, Hargrave J held that a D&O policy did not respond to the legal costs incurred by James Hird in his unsuccessful challenge to the joint investigation by ASADA and the AFL into the Essendon supplements programme. Importantly, whilst the policy in question responded to legal costs incurred in defending claims and responding to regulatory investigations, it did not respond to legal costs incurred in taking the proactive step of initiating proceedings even though the Court acknowledged that sometimes “attack is the best form of defence”.
The decision is a useful reminder of the importance of policyholders carefully considering whether the cover provided by their various policies meets their individual needs and requirements.
Further detail and analysis of the decision is provided below.
Issues before the Court
The decision concerned the unsuccessful 2014 Federal Court challenge by James Hird, the prominent coach involved in the scandal over the Essendon Football Club’s (Essendon) supplements program, concerning the Australian Sports Anti-Doping Authority’s (ASADA) joint investigation with the Australian Football League (Investigation).
Hird challenged the validity of show cause notices issued to Essendon’s players, claiming that they were invalidated by reason of ASADA relying on the findings of the Investigation. Critically, no show cause notice was issued to Hird himself.
The case centred on the question of whether the legal expenses of Hird’s challenge were indemnified under the D&O Policy (Policy) provided by Chubb Insurance Company of Australia (Chubb) to Essendon. The parties agreed that Hird was an “Insured Person” under the Policy and that Essendon had not indemnified Hird for the costs he was claiming (a requirement of one of the insuring clauses in issue). Hird claimed that he should be indemnified under the Policy as the costs of the Federal Court application were either covered under:
- insuring clause A as a covered Loss for which he was not indemnified by Essendon on account of an Executive Claim first make during the Policy Period for a Wrongful Act occurring before or during the Policy Period; or
- insuring clause C as covered Legal Representation Costs on account of an Formal Investigation commenced during the policy period.
The court rejected both of those propositions.
In respect of Insuring Clause A, the Court found that the Investigation was neither a demand nor formal proceeding against Hird for a Wrongful Act and thus there was no “Executive Claim” for the purposes of the insuring clause. In respect of Insuring Clause C the Court found that the costs of the Federal Court action taken by Hird were not Legal Representation Costs “on account” of the Investigation.
Hird accordingly did not recover from Chubb the almost $700,000 in legal costs incurred in his Federal Court application.
Why wasn’t Hird covered?
Hargrave J held that, in contrast with the formal charge brought against Hird by the AFL, the Investigation (which preceded that charge) was merely an inquiry into whether the charge should be laid. The fulcrum of the decision of Hargrave J is that the evidence does not establish that “… any Wrongful Act was alleged against Mr Hird prior to the AFL charging him with an offence against the AFL Player Rules on 13 August 2013.” The language used in the correspondence between Hird and both ASADA and the AFL did no more than assert that both of those agencies were inquiring into whether Hird and Essendon players and staff mayhave use prohibited substances or engaged in prohibited methods. His Honour also found that the interview notice issued for the Investigations did not constitute a demand or a formal proceeding under the definition of “Executive Claim”. Hird relied on similar policy terms in cases from the USA, but Hargrave J rejected these submissions on the construction of the policies in those cases and the principles of interpretation used in that jurisdiction.
While agreeing with the assertions put forward on behalf of Hird that costs expended in defending a Formal Investigation can include a proactive challenge to the actual investigation itself, Hargrave J cited O’Sullivan v Lunnon (1986) 163 CLR 545 noting “… there is an essential element of causation in the phrase ‘on account of’ …”, which he held that Hird had failed to establish by evidence. Hargrave agreed with Chubb’s contention that Hird had not proved a causal link between his attendance and provision of materials to the Investigation “…and his decision to commence and maintain his Federal Court application and appeal …” the nexus required by Hird for indemnification under the Policy. On his own evidence Hird’s reason for commencing the Federal Court application was “… to protect [his] reputation and position as coach of [Essendon], to protect or advance his ‘continued employment related to the AFL’…” As a causal link between the Federal Court application and the Investigation was not able to be established by the court on the evidence, the court found that Chubb was not required to indemnify Hird for the costs.
Whilst traditionally cover for legal costs under D&O policies focused on costs in defending legal proceedings, the scope of cover has widened to include representation costs in inquiries and investigations and even in some cases costs in attending inquiries conducted by the company prior to any formal investigation or following on a notification of a breach of a legal requirement.
The coverage Mr Hird sought in this case is one step further. He sought coverage for costs in challenging the validity of orders which arose from information obtained in a formal investigation. Such costs do not readily fall within the usual insuring clauses in respect of defence costs for proceedings or legal representation expenses for investigations.
However, there are policies which include extensions of cover for “prosecution costs” which provide cover for challenging an order in connection with disqualification or prohibition of an insured person from managing a corporation (which could be tailored to suit the relevant role of the insured person). Such an extension to the Policy is unlikely to have benefitted Hird because he himself had not been issued a show cause notice by ASADA, nor was he able to show a link between the Federal Court challenge and his specific role in the Investigation. “Prosecution costs” will not usually extend to cover an insured’s challenge to an order or notice which is not specifically made or proposed to be made against the insured.
We are also aware of examples of both D&O and Professional Indemnity policies being endorsed to include provisions for costs which may mitigate an unquantified loss which insurers might have to meet at a future date (“mitigation costs”). However, such extensions are normally aimed at dealing with mitigation costs arising from mitigating a potential plaintiff claim rather than an investigation. Where a D&O policy does not include such an extension, it may be possible to seek such cover via a negotiated endorsement.
These types of endorsements and extensions provide cover for proactive steps that deal quickly and effectively with a matter in its early stages resulting in a reduced payment to the potential claimant and a significant saving in overall costs. You may wish to consider whether this type of protection is required.