Baycorp Advantage Limited v Royal and Sun Alliance Insurance Australia Limited

The case of Baycorp Advantage Limited v Royal and Sun Alliance Insurance Australia Limited involved a dispute regarding the proper construction of a directors and officers indemnity policy. The insured party, Baycorp Advantage Limited, sought to be indemnified by the insurer, Royal and Sun Alliance Insurance Australia Limited, for losses incurred in three sets of proceedings that had been settled. The policy defined "Loss" to include the amount determined by settlement which an insured person was legally liable to pay in respect of a claim. The Deed of Settlement provided that the corporate defendant, on behalf of itself and each of the other defendants, would pay the plaintiffs. The insurer contended that the policy did not obligate it to indemnify the corporate entity because the Deed of Settlement did not impose a legal liability on the corporate entity.

The primary legal issues before the court were whether the Deed of Settlement resulted in the insurer being liable under the policy to indemnify the corporate entity, and whether the insurer could avoid its obligation to pay defence costs simply because the corporate entity received a benefit from those costs being incurred. The court also considered whether a claims condition providing for the allocation of costs between loss covered by the policy and loss not covered by the policy was enforceable. The court's reasoning focused on the principles of construction of policy and commercial agreements, joint and several liability, and the insurer's failure to exercise its right to take over and conduct the defence or settlement of the claim. The court held that the Deed of Settlement did not impose a legal liability on the corporate entity and, therefore, the insurer was not liable to indemnify the corporate entity. The court also held that the insurer was not relieved of its obligation to pay defence costs simply because the corporate entity received a benefit from those costs being incurred. Finally, the court found that the claims condition was unenforceable as an agreement to agree and/ or void for uncertainty.

The final orders of the court included a declaration that the insurer was not liable to indemnify the corporate entity under the policy, that the insurer was required to pay defence costs, and that the claims condition was unenforceable. The court also awarded costs to Baycorp Advantage Limited.