Rich v CGU Insurance Ltd

Link copied
Case Copied 49 min read

HIGH COURT OF AUSTRALIA

GLEESON CJ,
McHUGH, GUMMOW, KIRBY AND CALLINAN JJ

Matter No S232/2004

JOHN DAVID RICH APPELLANT

AND

CGU INSURANCE LIMITED  RESPONDENT

Matter No S233/2004

MARK ALAN SILBERMANN  APPELLANT

AND

CGU INSURANCE LIMITED  RESPONDENT

Rich v CGU Insurance Limited

Silbermann v CGU Insurance Limited

[2005] HCA 16

7 April 2005
S232/2004 and S233/2004

ORDER

In each matter:

1.        Special leave rescinded. 

2.Appellant to pay the respondent's costs of the proceedings in this Court.

On appeal from the Supreme Court of New South Wales

Representation:

D L Williams SC with M A Jones for the appellants (instructed by Joanne Kelly)

D F Jackson QC with A W Street SC and E G Romaniuk for the respondent (instructed by Colin Biggers & Paisley)

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

  1. GLEESON CJ, McHUGH AND GUMMOW JJ.   In suits in the Equity Division (Commercial List) of the Supreme Court of New South Wales, McClellan J ordered the separate determination of three questions.  Mr Rich and Mr Silbermann were two of three plaintiffs and each had been a director of One.Tel Ltd which is in liquidation.  The plaintiffs sought to establish that the defendant ("CGU") was obliged to provide indemnity for, and advance, defence costs of an investigation by the Australian Securities and Investments Commission ("ASIC"), of two proceedings instituted by ASIC in the Supreme Court and of other proceedings, all involving questions of possible serious breaches of duty by the plaintiffs.

  2. The liability of CGU was said to arise under a "Directors & Officers Liability Insurance Policy" issued on 2 August 2000 by CGU ("the Policy").  The Policy is in a form resembling, in some respects, that of the policy which falls for consideration by this Court in Wilkie v Gordian Runoff Ltd[1] but differing in other respects.  It is not to be assumed that the construction given to the policy in Wilkie would control the present case.

  3. The plaintiffs had commenced by summonses, to each of which there was appended a detailed summary of contentions resembling a pleading by statement of claim.  By CGU's amended points of defence, it advanced contentions summarised therein as follows:

    "[C]ertain of the claimed Defence Costs do not come within the terms of the Policy, that Exclusion Clause 3.1 applies in relation to the alleged wrongful acts, and that the contract has been validly avoided by reason of both fraudulent non‑disclosure and fraudulent misrepresentation."

  4. The reference above to avoidance by CGU of the contract of insurance is to the step open to an insurer under s 28(2) of the Insurance Contracts Act 1984 (Cth) ("the Insurance Contracts Act")[2].  The relief sought by the plaintiffs included an order that CGU advance the defence costs described above, incurred and to be incurred by them.  It will be apparent that if at the trial CGU made good its case of avoidance that would bring down the…

CaseChat AU logo

Keep reading for free

Create a free CaseChat account to read Rich v CGU Insurance Ltd and more:

  • Read every judgment in full
  • Ask AI and get answers linked to paragraphs
  • See how each paragraph was cited in later cases
  • Download judgments as PDF or Word
Continue with Google

One click creates your free account or signs you in.

By continuing you agree to the Terms and Privacy Policy.

Details
Case
[2005] HCA 16
Decision Date

CaseChat Overview and Summary

The case involved a dispute between directors and officers of One.Tel Limited (in liquidation), the appellants, and their professional indemnity insurer, CGU Insurance Limited, the respondent. The appellants sought advance payment of their legal defence costs incurred in defending proceedings initiated against them by the Australian Securities and Investments Commission (ASIC). CGU Insurance denied liability, relying on an exclusion clause in the policy and also seeking to avoid the policy under the *Insurance Contracts Act 1984* (Cth). The High Court granted special leave to appeal.

The central legal issue before the High Court was the proper construction of the exclusion clause in the directors and officers liability insurance policy. Specifically, the court had to determine whether the insurer could rely on an exclusion for dishonest, fraudulent, or malicious conduct when such conduct had not yet been established by a final judgment or other adjudication adverse to the insured directors. A further issue concerned the utility of considering the correctness of the answered questions in light of other undisturbed answers, and whether special leave to appeal should be revoked.

The High Court rescinded the special leave to appeal granted to the appellants. While the primary judge had found in favour of the insurer, holding that the exclusion clause could be relied upon even in the absence of a prior adverse adjudication, the High Court's decision to rescind special leave meant that the correctness of this finding was not ultimately determined by the High Court. The court ordered that the appellants pay the respondent's costs of the proceedings in the High Court.

Orders

Orders of the court

In each matter:

1. Special leave rescinded.

2. Appellant to pay the respondent's costs of the proceedings in this Court.

Background

Background to the litigation

These appeals raise questions as to the proper construction of the respondent's policy of insurance indemnifying the appellants as directors and officers of a corporation, in particular a clause of it excluding liability to provide indemnity if a judgment or other final adjudication has established dishonest conduct by the appellants. The indemnity presently sought from the respondent is the amount of legal costs incurred by the appellants in defending proceedings commenced against them by the corporate regulator, the Australian Securities and Investments Commission ("ASIC"). The appellants contend that the respondent is not entitled to decline to provide funds pursuant to the policy because there has been neither a judgment nor any other final adjudication establishing dishonest conduct by them. The respondent asserts that it is entitled to refuse to provide indemnity whilst it pursues its own proceedings against the appellants to obtain a judgment establishing dishonest conduct by them. Each party advances a construction in support of his and its stance. In my view, the appellants' construction is to be preferred. But, as will appear, that does not mean that the appellants' appeals must succeed. Facts The appellants are former directors of One.Tel Limited (In Liquidation) ("One.Tel"). On 29 May 2001, the directors of One.Tel appointed administrators of the company under s 436A of the Corporations Law as it then was. Soon afterwards, on or about 31 May 2001, ASIC started to investigate the failure of One.Tel, as well as possible contraventions of the Corporations Law by its directors. During the investigation, ASIC sought an injunction against the appellants prohibiting them from transferring or otherwise disposing of their assets, and requiring them to attend an examination under s 596A of the Corporations Law to be conducted by it. On 12 December 2001, ASIC filed originating proceedings in the Supreme Court of New South Wales seeking, among other things, declarations that the appellants contravened s 180(1) of the Corporations Law[16], orders prohibiting them from managing a corporation, and orders requiring them to pay compensation to One.Tel. The appellants have already apparently incurred substantial legal costs and charges in monitoring and attending the examination, and in defending the proceedings, including costs and expenses incurred by them in attending public examinations conducted by the liquidators of One.Tel in 2002 and in defending a claim by American Express International Inc in relation to the use of credit cards.[16]That section, which has been retained in the Corporations Act 2001 (Cth), required directors to exercise reasonable care and diligence in the discharge of their duties. It provided:"180(1) Care and Diligence – directors and other officersA director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:(a)were a director or officer of a corporation in the corporation's circumstances; and(b)occupied the office held by, and had the same responsibilities within the corporation as, the director or officer."

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

HUGH AND GUMMOW JJ KIRBY J CALLINAN J
In their final form, the questions put to the Supreme Court were:"1.Whether, on the true construction of Directors & Officers Liability Insurance Policy No 01 DO 0298798 ('the Policy'), issued by the Defendant absent an existing judgment, order or other final adjudication adverse to the Plaintiff, the Defendant can rely on Exclusion Clause 3.1 in answer to the Plaintiff's claim for indemnity under the Policy; 2.Whether, on the true construction of the Policy issued by the Defendant the Defendant itself is entitled to seek a judgment, order or other final adjudication adverse to the Plaintiff and, thereby, exclude liability for a claim under clause 3.1 of the Policy in the same proceedings in which the Plaintiff makes a claim for indemnity against the Defendant;3.Whether, on the true construction of the Policy issued by the Defendant, exclusion clause 3.1 of the Policy operates to exclude liability on the part of the Defendant to pay claims by the Plaintiff for indemnity for Defence Costs under:(i) clause 2.1 of the Policy;(ii) clause 2.6 of the Policy; (iii) Insuring Agreement A of the Policy; and(iv) Insuring Agreement B of the Policy."The decision of the primary judge McClellan J delivered his reasons for judgment on 18 December 2002, answering all three questions in the affirmative[18]. In relation to Questions 1 and 2, his Honour was of the view that the final paragraph of cl 3.1 did not operate to prevent the respondent from relying upon the exclusion clause to deny indemnity in circumstances in which there has been no relevant finding of dishonesty in other proceedings. His Honour observed that there is a variety of circumstances in which adverse findings may be made in relation to the conduct of a director or officer, including in a Royal Commission or official investigation, or other similar proceedings. Findings in any of those would not however justify a denial of indemnity. His Honour concluded that a denial of indemnity could be established by an insurer, virtually in any proceedings, whether the insurer was or was not a party to them, and, if it was, that it could, in such proceedings, in good faith, maintain its stance that its insureds acted dishonestly[19]:"However, there is nothing in the clause to suggest that the exclusion should be confined to a finding in proceedings other than the indemnity proceedings. The rights of the parties to a policy of insurance often have to be determined by a court. In such proceedings, either party is able to advance its position and assert that the objective facts entitle the insured to indemnity or otherwise. This does not involve any lack of 'good faith' by either party. The court will determine the parties' rights having regard to the evidence which the parties tender at the trial and the findings which it makes." [18]Silbermann, Greaves and Rich v CGU Insurance Ltd [2002] NSWSC 1195.[19][2002] NSWSC 1195 at [46]. With respect to Question 3, McClellan J held that absent exclusion cl 3.1, the respondent would be obliged to indemnify a director or officer with respect to any "Loss", this being defined to include "Defence Costs", which in turn is one of the amounts payable "in respect of a Claim". Accordingly, to the extent that cl 3.1 excludes "indemnity against any Claim", it excludes indemnity in relation to "Defence Costs" associated with that "Claim".

Ratio Decidendi

Legal Principle Established

Established by: HUGH AND GUMMOW JJ, KIRBY J, CALLINAN J

Full text does not contain this section.