Lawyers often get sued. One cannot possibly imagine why. To help protect against this risk, we take out insurance. We understand this to mean that if a disgruntled client sues us, our insurer will pick up the defence tab, and usually take over the running of the case on our behalf as well. In exchange, we must pay our premiums and, if the worst happens, make sure that the insurer is kept up to date with any developments and otherwise help out where needed.
‘D&O policies’, as they are commonly known, tend to come from a similar place. The role of ‘Director’ and ‘Officer’ of a company or organisation carries with it a heightened level of legal risk. It is wise to insure against such risk, including the risk of being sued. Because litigation, as we all know, is very expensive.
James Hird, “ a famous player for the Essendon Football Club in the Australian Football League” (as the judge stated), ran a novel case against his insurer Chubb under his D&O policy. Insured as an executive when formerly a coach of the Club, he sued Chubb after it refused to pay his legal costs for failed litigation he brought against the Australian Sports Anti Doping Authority (ASADA).
That’s right. James Hird was the plaintiff, and also the appellant of a subsequent failed appeal. He was the protagonist, and not the defendant. At the heart of his case was this curiosity. Can a plaintiff have grounds to recover defence costs?
Justice Hargrave of the Supreme Court of Victoria dismissed Mr Hird’s case against Chubb by a judgment handed down on 3 May 2016. Unless there are special circumstances, one expects Mr Hird will soon be liable for Chubb’s legal costs as well.
An interesting aspect of the decision confirms that an attack can be a form of defence (under a D&O policy anyway). In this sense, Mr Hird’s case was not too far off the mark. The key issue though, concerned the kind of attack. Was there a sufficient nexus between Mr Hird’s decision to sue, what he sought to defend, and the terms of the policy? Here, the judge held: No, there wasn’t.
The Chubb Policy interpreted
There were two clauses of the Chubb Policy at issue. These policies are an interminable read, involving lots of flipping between clauses and the definition sections. In the judgment, Hargrave J did a sterling job setting out the details, combined with lots of meaningful italics that are a metaphorical nod and a wink to the reader about his interpretation of them.
The judge also reminded us at the outset of the judgment that he was not in the mood for strained interpretations. He said the clauses have to be considered in a “common sense and non-technical way”. He used language such as “commercially sensible”, “businesslike” and “intended to produce a commercial result”. We get the point.
Clause (A) required Chubb to pay Mr Hird an amount representing his legal costs on account of a proceeding brought against him.
Insuring Clause (A) relevantly provided that: [Chubb] shall pay, on behalf of each Insured Person, Loss for which the Insured Person is not indemnified by [Essendon] on account of any Executive Claim first made during the Policy Period … for a Wrongful Act occurring before or during the Policy Period. The definitions clarified that this clause concerns a “proceeding” “against” the insured (see definition of ‘Executive Claim’) for something he or she has allegedly committed or attempted to commit (see definition of ‘Wrongful Act’).
Clause (C) required Chubb to pay Mr Hird an amount representing his legal costs on account of a formal investigation (being some form of inquiry).
Insuring Clause (C) relevantly provided that: [Chubb] shall pay, on behalf of each Insured Person, Legal Representation Expenses on account of any Formal Investigation commenced during the Policy Period.
So, the fundamental difference between the clauses was that one concerned the costs of a proceeding, and the other concerned the costs of a formal investigation.
Clause (A) – No demand, no Wrongful Act
Justice Hargrave comprehensively disposed of Mr Hird’s claim under Clause (A), so let’s deal with it first. He held that there was no demand or formal proceeding against Mr Hird capable of invoking the clause. Mr Hird’s attempt to rely on an interview notice he received as part of the joint investigation conducted by the AFL and ASADA was given short shrift. As the judge said, “the definition requires that there be a written demand or formal proceedings against Mr Hird for a Wrongful Act, and not merely an inquiry which may lead to such a demand or proceeding”.
By contrast, a notice of charge separately brought against Mr Hird by the AFL was clearly a ‘formal proceeding’. However, that matter was resolved by a settlement deed and Mr Hird had made no claim for those costs.
Further, there was an insufficient nexus between the interview notice and the ‘Wrongful Act’ (such as there was one). As the judge said (using his typical meaningful italics): “Until [13 August 2013], both the AFL and ASADA were merely investigating whether the Essendon players and support persons, including Mr Hird, may have engaged in Wrongful Acts. On ASADA’s part, it never moved from investigating Mr Hird’s conduct to alleging any Wrongful Act against him.”
That is, ASADA’s only allegations were made against the Essendon players, but never against Mr Hird.
The judge said that ASADA’s interim report confirmed this, when it expressly acknowledged that it had insufficient evidence to issue show cause notices to any person in connection with the subject matter of the joint investigation. No show cause notice was ever issued to Mr Hird.
Clause (C) – Insufficient causal nexus between interview and bringing legal proceedings
Mr Hird won the battle but lost the war with his claim under this clause. The analysis here moved into legal archetypal territory: splitting hairs.
Importantly, the judge was easily convinced that the joint investigation conducted by ASADA and the AFL satisfied the description of a Formal Investigation.
Even better, Mr Hird gained significant ground when the judge accepted his contention that attack could be a form of defence. Justice Hargrave rejected Chubb’s argument that ‘Defence Costs’ would not permit any form of proactive challenge. He said:
“In my opinion, construed in the context of the D&O section of the policy as a whole, the specified reasons for incurring Defence Costs should be interpreted as including positive defensive action, as in the aphorism ‘attack is the best form of defence’” (at ).
This was because, as the logic went, a coordinated plan or system of defending often required a proactive tactical approach. The judge explained that in civil proceedings, it is commonplace for challenges to be made to a claim that do not merely involve defending the allegations made. For example, within the context of a proceeding, applications to strike out the allegations or to dismiss the proceeding as an abuse of process will be required. These are concepts, he said, which fall naturally within the concept of defending a proceeding.
For insurers hoping to rely on a narrow construction of Defence Costs, proceed with caution. This is because Justice Hargrave gave the following examples of proactive conduct likely to be caught by Clause (C):
- When an insured challenges the legality of a notice such as an interview notice;
- When an insured challenges the conduct of an investigation because, say, the conduct of the investigating body exceeds power or may give rise to a reasonable apprehension of bias; and
- When an insured, after cooperating in the course of an investigation, receives advice to the effect that the information supplied is likely to give rise to an Executive Claim being made against him or her – If advice is received that there is a reasonable basis to obtain relief from a court preventing the investigative body from using the information as a basis for making such a claim, then the insured may act reasonably in seeking such relief from a court.
The upshot was that most of Chubb’s construction arguments were shot down.
Chubb won at the last hurdle.
This was when the judge tested Mr Hird’s rationale for suing against example 3 above. He found the motive wanting. He considered Mr Hird’s reasons for suing too broad, failing to fit with precision within the ‘item 3 box’.
There were five reasons why Justice Hargrave determined that Mr Hird had not proved a causal link between his attendance at the interview, or his production of documents or other information to the joint investigation, and his decision to commence and maintain his Federal Court application and appeal and thus incur his legal costs. Accordingly, the Chubb clause did not apply.
First, Mr Hird failed to give evidence about what exactly happened during the interview: what he said, the content of the 7,000 text messages recovered, and so on. The judge did not say what followed from this. One gains the impression the judge simply did not have enough to help him decide whether Mr Hird’s motive in suing could be justified by the information he supplied to investigators.
One infers from the judgment some discomfort that Chubb should be asked to pay legal costs when it is half in the dark about all relevant circumstances behind the claim.
Secondly, Mr Hird did not tender in evidence the transcript of his interview, the ‘show cause notices’ or other such material. Justice Hargrave was unsympathetic to Mr Hird’s reliance on confidentiality orders in the Federal Court proceeding for failing to do so.
One infers from the judgment some concern that Mr Hird was selective in his revelation of confidential material. For instance, he had no difficulty revealing confidential legal advice provided not just to him, but also to Essendon Football Club by separate legal advisers he did not retain. Mr Hird disclosed this to justify why he considered it reasonable to sue ASADA and then to appeal the decision against him.
The judgment does not address the waiver of legal professional privilege issues arising from such disclosure, including in relation to legal advice where Mr Hird was not the client.
If the cards were on the table in relation to some confidential material, left unspoken is the question: why not all of it?
Thirdly, the judge was not prepared to draw an inference of a causal link when Mr Hird had been a witness but failed to explain what information caused him to sue ASADA.
Fourthly, Mr Hird’s motive in bringing proceedings against ASADA lacked the required nexus with a genuine defensive strategy. It was linked more to protecting his reputation and guaranteeing that he had a job.
Mr Hird’s motive can be best explained in his own words:
“I received further advice from Mr Amendola in those discussions which, together with the advice from counsel, resulted in me deciding that, if it became apparent that the investigation would lead to ASADA issuing show cause notices against me or against the [Essendon] players, I would issue proceedings challenging the investigation to protect my reputation and position as coach of [Essendon]. Prior to being coach of [Essendon] I had been an [Essendon] player, captain of [Essendon], Brownlow Medallist, Norm Smith Medallist and inducted into the AFL Hall of Fame. My primary source of income was through my continued employment related to the AFL.”
He then proceeded to link the issue of show cause notices to the Essendon players with the potential for him to lose income:
“One of the reasons was reputation. Another reason was that I feared I wouldn’t have a job because I had been told if the players received show cause notices by the club, that there was a very good chance I wouldn’t have a job and also I wouldn’t have a team to coach because 34 players may not be able to play”.
Finally, Mr Hird’s claims in the Federal Court proceeding were not limited to his information supplied in response to investigators’ requests. Rather, the relief sought (declarations and injunctions) assumed that ALL the information supplied in the joint investigation (whether by him, players or others) was unlawfully obtained.
The devil is in the detail. That is the key lesson from this decision, and applies in most cases concerning contractual construction.
The central question in this case has plagued lawyers from law school to the lofty heights of the judiciary: what is the causal connection or relationship between two events that means one party is therefore liable to the other?
As night follows day, insurers will want to answer this question narrowly, and plaintiffs will want to answer it broadly.
Here, the insurer won. But only just.