Supreme Court New South Wales Medium Neutral Citation: Ransley v Chubb Insurance Company of Australia Limited [2015] NSWSC 854 Hearing dates: 24 June 2015 Decision date: 02 July 2015 Before: Ball J Decision: 1. The separate questions should be answered as follows: Question 1: The defendant's maximum liability under Insuring Clause 1.D in respect of each claim by a former director who incurred Legal Representation Expenses in relation to the Inquiry depends on the extent to which Limit of Liability specified in Item 2(a) of the Schedule has been eroded by claims for Legal Representation Expenses already paid by the defendant. The defendant's liability does not exceed $1 million in aggregate (and a further $1 million in the aggregate under Extension 2.F if claims for Legal Representation Expenses are made under that Extension). Question 2: $1 million (plus a further $1 million in the aggregate under Extension 2.F if claims for Legal Representation Expenses are made under that Extension). 2. The plaintiff should pay the defendant's costs of and incidental to the hearing of the separate questions; 3. Stand the matter over for directions before the List Judge on 10 July 2015. Catchwords: CONTRACTS – General contractual principles – Construction and interpretation of contracts – Construction of directors and officers insurance policy – Where coverage is sought for legal expenses arising from formal investigation – Whether cover available under insuring clause is available in respect of each insured person or in respect of all persons incurring legal expenses with respect to a formal investigation in the aggregate – Whether construction limiting insurer's liability to aggregate of insured persons with respect to each formal investigation is uncommercial Category: Procedural and other rulings Parties: Craig Anthony Ransley (Plaintiff) Chubb Insurance Company of Australia Limited ABN 69 003 710 647 (Defendant) Representation: Counsel: A P Coleman SC | Ms J Curtin (Plaintiff) T M Mehigan (Defendant) Solicitors: Horton Rhodes (Plaintiff) Clyde & Co (Defendant) File Number(s): 2015/31956 Publication restriction: None Judgment Introduction 1. The plaintiff, Mr Ransley, is one of the former directors of Doyles Creek Mining Pty Ltd (DCM) who was required to give evidence at a public inquiry by the Independent Commission Against Corruption (ICAC) into the circumstances of the grant to DCM of Exploration Licence No 7270 over a coal mining tenement in the Hunter Valley (the Inquiry). In these proceedings, Mr Ransley seeks a declaration that the defendant, Chubb, is liable to indemnify him in the sum of $2,000,000 under a Directors and Officers Liability policy (the Policy) issued to DCM in respect of legal costs he incurred in connection with the Inquiry. 2. Chubb does not dispute that it is liable to indemnify Mr Ransley for costs incurred by him in connection with the Inquiry. However, it claims that its maximum aggregate liability for all claims for costs under the Policy in relation to the Inquiry is $2,000,000 of which it has already paid $1,248,377.83, leaving an amount of $751,622.17 to meet all outstanding claims, including Mr Ransley's. 3. On 20 March 2015, Hammerschlag J ordered that the following questions be determined separately from and prior to all other questions in the proceedings: 1. What is the defendant's maximum liability under the directors and officers liability insurance policy number 93301280 (the Policy) in respect of each claim made by an Insured (as defined in the Policy) under Insuring Clause 1D of the Policy? 2. What is the defendant's maximum aggregate liability under the Policy in respect of claims made by Insureds under Insuring Clause 1D of the Policy? The Policy 1. The Policy is in two sections. The first consists of general terms and conditions (GTCs). Item 1 of the GTCs identifies the "Principal Organisation" as DCM. Item 4 indicates that the cover available under the Policy is the coverage provided by the Directors and Officers Liability Coverage Section (the D&O Section). 2. Clause 3 of the GTCs provides: Limits of Liability and Deductible Amounts 3. Unless stated to the contrary in any Coverage Section, the Limits of Liability and Deductible Amounts shown for each Coverage Section are separate Limits of Liability and separate Deductible Amounts pertaining to the coverage Section for which they are shown. For the avoidance of doubt, the application of a Deductible Amount under one Coverage Section shall not reduce the deductible amount under any other Coverage Section. The Limits of Liability specified in the Schedule for each Coverage Section shall be the Company's maximum Limit of Liability under such Coverage Section for the entire Policy Period, regardless of whether the Policy Period is less than, the same as or greater than one year. 1. Clause 2 of the GTCs states that if there is an inconsistency between the GTCs and the terms and conditions of any Coverage Section "the terms and conditions of such Coverage Section shall control for the purposes of that Coverage Section". 2. The insuring clause is contained in cl 1 of the D&O Section. Clause 1.A provides cover for loss suffered by an Insured Person that is not covered by an indemnity from DCM (or one of its subsidiaries) on account of any Claim first made during the Policy Period for any Wrongful Act. Clause 1.C provides cover to DCM (and its subsidiaries) where it indemnifies an Insured Person for losses covered by the Policy. The cover in respect of Legal Representation Expenses is contained in clause 1.D. That clause provides: Legal Representation Expenses D. The Company shall pay, on behalf of each Insured Person, Legal Representation Expenses on account of any Formal Investigation commenced during the Policy Period. 1. "Insured Person" is defined in cl 3 to include a director or officer of "an Organisation", which is defined to mean DCM and any of its subsidiaries. 2. "Legal Representation Expenses" is defined to mean: … reasonable Defence Costs which an Insured Person incurs on account of the attendance and/or the provision of documents or information by such Insured Person in an Insured Capacity at or to any Formal Investigation. "Defence Costs" is defined to mean "that part of Loss consisting of reasonable costs, charges, fees … incurred in defending, investigating, settling or appealing any Claim …". 1. It is not disputed that the Inquiry was a Formal Investigation commenced during the Policy Period. Nor is it disputed that the costs incurred by Mr Ransley in connection with that Inquiry were, to the extent that they were reasonable, Legal Representation Expenses. 2. Clause 2.F of the D&O Section relevantly provides: Dedicated Additional Limit of Liability for Directors and Officers The Company shall pay, under this Extension only, on behalf of any Director or Officer, Loss on account of any Claim first made during the Policy Period, or, if exercised, during the Extended Reporting Period, for a Wrongful Act occurring and Formal Investigation into conduct occurring before or during the Policy Period. The Company's maximum liability under this Extension shall not exceed the aggregate as set forth in Item 2 of the Schedule inclusive of all Loss in respect of all Claims against all Directors or Officers. 1. "Loss" is relevantly defined to mean: … the amount which an Insured becomes legally obligated to pay on account of any covered Claim including but not limited to: (a) Defence Costs; (b) Legal Representation Expenses; (c) … "Insured" is defined to mean "an Organisation and/or Insured Persons". 1. "Claim" is defined to mean "With respect to Insuring Clause 1.D only, a Formal Investigation". 2. Item 2 of the Schedule relevantly provides: (a) Each Loss Insuring Clause A. $5,000,000 … Insuring Clause D. $1,000,000 (b) Each Policy Period $5,000,000 1. The critical clause is cl 7. It relevantly provides: LIMIT OF LIABILITY AND DEDUCTIBLE The Company's maximum liability for Loss on account of each Claim, whether covered under one or more Insuring Clauses, shall not exceed the Limit of Liability for each Loss set forth in Item 2(a) of the Schedule. Other than with respect to Extension 2.F. Dedicated Additional Limit of Liability for Directors and Officers, where granted, the Company's maximum aggregate liability for Loss on account of all Claims first made during the Policy Period, whether covered under one or more Insuring Clauses, shall not exceed the Limit of Liability for each Policy Period set forth in Item 2(b) of the Schedule. Notwithstanding the above, the Company's maximum liability for Loss in respect of which a sub-limit is specified for each Loss and/or each Policy Period in the Schedule or any endorsement shall be that specified sub-limit of liability. Sub-limits are part of, and not in addition to the Limits of Liability set forth in Items 2(a) and 2(b) of the Schedule. If granted, the Company shall pay the Dedicated Additional Limit of Liability for Directors and Officers in addition to the Limits of Liability set forth in Items 2(a) and 2(b) of the Schedule only after the Company has paid the full amount of the applicable Limit of Liability. The Dedicated Additional Limit of Liability for Directors and Officers is not eroded by payments within the Limits of Liability set forth in Items 2(a) and 2(b) of the Schedule. Defence Costs and Legal Representation Expenses are part of, and not in addition to, the Limits of Liability set forth in Item 2 of the Schedule, the payment by the Company of Defence Costs or Legal Representation Expenses erodes such Limits of Liability. The Company's liability on account of each and every Claim shall apply only to Loss which is allocated to covered Loss and only to that part of Loss so allocated which is in excess of the applicable Deductible Amount set forth in Item 3 of the Schedule. Such Deductible Amount shall be depleted only by Loss and shall be borne by the Insured uninsured and at their own risk. No Deductible Amount shall apply to any Loss for which an Organisation is prevented by law or due to Financial Impairment from indemnifying an Insured Person. All Related Claims shall be treated as a single Claim first made on the date the earliest of such Related Claims was first made, or on the date the earliest of such Related Claims is treated as having been made in accordance with section 9. Reporting and Notice, regardless of whether such date is before or during the Policy Period. … 1. Clause 13 provides: PRIORITY OF PAYMENTS In the event payment of Loss is due under this Coverage Section but the amount of such Loss in the aggregate exceeds the remaining available Limit of Liability for this coverage section, the Company shall: A. first pay such Loss for which coverage is provided under Insuring Clause 1.A of this Coverage section; then B. to the extent of any remaining amount of the Limit of Liability available after payment under a. above, pay such Loss for which coverage is provided under any other Insuring Clause of this Coverage Section. Except as otherwise provided in this section, the Company may pay Loss as it becomes due under this Coverage Section without regard to the potential for other future payment obligations under this Coverage Section. The issue 1. The parties agree that the effect of extension 2.F is to provide additional cover totalling $1,000,000 for all claims by all directors and officers during the policy period over and above the cover available under cl 1.D of the D&O Conditions. The dispute concerns the cover available under cl 1.D and the limitation on that cover imposed by cl 7. 2. It is Mr Ransley's contention that cl 1.D provides cover of up to $1,000,000 to each director in respect of Legal Representation Expenses incurred in connection with the Inquiry. It is Chubb's contention that cl 1.D only provides cover of up to $1,000,000 for all such expenses. Consideration 1. Mr Ransley's contentions focus on the word "Loss" in the first sentence of cl 7. "Loss" relevantly means the amount of Legal Representation Expenses an Insured is legally obligated to pay on account of any Claim. Consequently, the first sentence must be read as saying that the maximum liability for Legal Representation Expenses incurred by an Insured is the amount set forth in Item 2(a) of the Schedule – that is, $1,000,000. Item 2 of the Schedule specifically states the limit of liability by reference to "Each Loss". 2. That interpretation is said to be supported by other provisions of the Policy. 3. The relevant insuring clause (cl 1.D) provides that Chubb "shall pay, on behalf of each Insured Person, Legal Representation Expenses …" (emphasis in italics added). The cover available under the insuring clause is available in respect of each Insured Person, which includes each director. It is natural to read the limitation in cl 7 as a limitation that operates by reference to the same criterion as the insuring clause – that is, by reference to the loss suffered by each Insured Person. 4. Moreover, cl 7 should be contrasted with cl 2.F. The latter clause makes it plain that Chubb's maximum liability under that extension "shall not exceed the aggregate as set forth in Item 2 of the Schedule inclusive of all Loss in respect of all Claims against all Directors and Officers" (emphasis in italics added). If the parties had wanted to achieve the same result in relation to the cover provided by cl 1.D, cl 7 would have read "The Company's aggregate maximum liability for all Loss on account of all Claims …". The choice not to use those words must have been deliberate. 5. Mr Ransley also points out that, to the extent cl 3 of the GTCs supports Chubb's construction of the Policy, that clause is inconsistent with cl 7 and under cl 2 of the GTCs, cl 7 is controlling. 6. Finally, Mr Ransley submits that his interpretation is consistent with the commercial purpose of the Policy. One purpose of the Policy is to provide cover against costs incurred in connection with Formal Investigations. Leaving aside the extension available under cl 2.F, the cover available under the Policy is $5,000,000. If Chubb is right, the total cover available in respect of each Formal Investigation is $1,000,000. Consequently, the cover would only be exhausted if there were five Formal Investigations during the Policy Period. The chance of that happening is remote. The likelihood is that if there is a Formal Investigation, it will involve a number of directors. If Chubb is right, between them they would only be entitled to cover of up to $1,000,000. That is not what the parties could have intended. 7. I do not accept Mr Ransley's submissions. In my opinion, they ignore the words in the first sentence of cl 7 "on account of each Claim". The maximum liability operates by reference to "Loss on account of each Claim", not by reference to Loss. The word "Loss", where it first appears in the sentence, is an abstract noun used to describe the nature of the loss covered by the policy in general. The loss with which the sentence is concerned is made specific by the following words, "on account of each Claim". Those words are essential to enable the limit stated in the sentence to operate. The limit of liability in respect of "each Loss" cannot operate on loss in the abstract. It must operate by reference to a particular loss, and the way that a loss is made particular is to tie it to a claim. The sentence then sets a maximum liability for each Loss that is tied to a particular claim. Read in that way, the sentence says that Chubb's maximum liability for Loss on account of each Claim shall not exceed the amount stated in Item 2(a) of the Schedule. In my opinion, that is the natural meaning of the sentence. 8. Mr Ransley seeks to read the word "Loss", where it first appears, as a specific noun meaning loss suffered by "an Insured". In support of that reading, he relies on the definition of "Loss" and seeks to substitute that definition for the word, so that the first sentence of cl 7 reads "The Company's maximum liability for the amount which an Insured becomes legally obligated to pay on account of any covered Claim …". But read in that way, the words "on account of each Claim" make no sense. Literally, substituting the definition of "Loss" for the word, the first sentence states that Chubb's maximum liability "for the amount which an Insured becomes legally obligated to pay on account of any covered Claim on account of each Claim" is the amount identified. What that could mean is unclear. Contrary to the submissions of Mr Ransley, it is not possible to substitute the definition of the word "Loss" for the word and preserve grammatical sense. Rather, the definition must be understood as giving meaning to the word but the grammatical role played by the word must be adjusted depending on the context in which it appears. As I have said, where it first appears in cl 7, the word "Loss" is used as an abstract noun to describe the types of loss identified in the definition. It is not itself used to describe any specific loss, which, because of the way in which the definition is worded, is the effect of substituting the definition for the word. 9. Moreover, even if the grammatical problem of substituting the definition for the word were solved by ignoring the words in the first sentence "on account of each Claim", the maximum liability would then apply in respect of the amount each Insured became legally obligated to pay (in respect of any covered claim), not in respect of Loss on account of each Claim. The result would be that the maximum cover available to each Insured in respect of all Formal Investigations would be the amount specified in the Schedule. That reading does not sit easily with other paragraphs of cl 7 or the Schedule. The Schedule identifies maximum liabilities for "Each Loss", not a maximum liability for each Insured. The second paragraph of cl 7 states that Chubb's maximum liability "for Loss in respect of which a sub-limit is specified for each Loss and/or each Policy Period" is the amount identified. It is clear that the word "Loss" when it first appears in this phrase is intended to be an abstract noun. The word does not refer to a specific loss and it is not possible meaningfully to substitute the definition for the word. In any event, it is apparent from the paragraph that the limit is intended to apply by reference to Loss, not by reference to an Insured. The sixth paragraph contains an aggregation clause. It states that "All Related Claims shall be treated as a single Claim". Clearly, the aggregation clause is intended to be relevant to the operation of the limits of liability contained in cl 7, and, in particular, the first paragraph of cl 7. However, if the first paragraph of the clause is to be interpreted in the way contended for by Mr Ransley, the aggregation clause appears to be irrelevant to the limit of liability imposed by the first paragraph, since that paragraph imposes a limit by reference to Insureds rather than Claims. 10. It is true, as Mr Ransley submits, that on the interpretation I prefer the Policy limit would only be exhausted by claims under cl 1.D if there were five unrelated Formal Investigations. But I do not think that that gives the Policy an uncommercial operation. It is important to bear in mind that the Policy is intended to cover loss arising from claims for a "Wrongful Act" as well as legal costs incurred in connection with Formal Investigations. Indeed, it might be inferred from cl 13 of the D&O Conditions that the primary purpose of the policy was to provide cover of the former type. In my opinion, it makes commercial sense to restrict the amount of cover available in respect of Formal Investigations to ensure that cover is available to meet claims and defence costs, particularly when it might be anticipated that a claim and associated defence costs could arise out of a Formal Investigation. That is what the sublimit in respect of Formal Investigations does. 11. It follows that the separate questions must be answered in the way contended for by Chubb. Orders 1. The orders of the court are: 1. The separate questions should be answered as follows: Question 1: The defendant's maximum liability under Insuring Clause 1.D in respect of each claim by a former director who incurred Legal Representation Expenses in relation to the Inquiry depends on the extent to which Limit of Liability specified in Item 2(a) of the Schedule has been eroded by claims for Legal Representation Expenses already paid by the defendant. The defendant's liability does not exceed $1 million in` aggregate (and a further $1 million in the aggregate under Extension 2.F if claims for Legal Representation Expenses are made under that Extension). Question 2: $1 million (plus a further $1 million in the aggregate under Extension 2.F if claims for Legal Representation Expenses are made under that Extension). 1. The plaintiff should pay the defendant's costs of and incidental to the hearing of the separate questions; 2. Stand the matter over for directions before the List Judge on 10 July 2015. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 July 2015