Between a rock and a hard place

D&O insurance is a tricky business at the best of times – and court rulings on these issues make it even harder says Ali Cromie

Directors seeking a realistic picture of the effectiveness of their D&O liability insurance policies can piggyback on analysis of pre-eminent judges for pointers on the protection and pitfalls inherent in such policies.
More than a dozen judges across the High Court of Australia and the Supreme Court of New South Wales have debated with legal counsel, as well as each other, in recent years on the meaning of key provisions of D&O policies.
D&O lawyers have naturally focused on “landmark” elements of recent High Court decisions involving disputed D&O policies. For the non-specialist, arguably, the greater value from the court cases arises from insights into:
• the litigation quagmire that can confront and confound a director trying to activate their D&O “lifeboat”;
• the ambiguities pervasive in D&O policies that disadvantage claimants; and
• the multi-million dollar legal bills that can be incurred as directors and officers seek to compel their D&O insurer to pay the legal bills for claims against them arising from their director and officer roles.

In whose interest?

High Court Justice Ian Callinan says, “Let us face it; the reality is that there are always going to be all sorts of allegations by insurers to try to get out of the (D&O) policy.”
Callinan’s observation came during consideration by three High Court judges of the application by former directors of One.Tel to hear their appeal against their D&O policy provider, CGU Insurance.
CGU had refused to advance legal fees to Jodee Rich, One.Tel’s former CEO and to Mark Silbermann, One.Tel’s former finance director, to defend ASIC litigation citing the fraud and dishonesty exclusion in their D&O cover. Callinan says that the fraud exclusion is a very common in D&O policies – in fact an almost universal one.
Callinan is a judge steeped in business: he has first-hand experience as a board director; as a Queensland silk he represented Alan Bond and Christopher Skase. He is considered one of the more “conservative” of the seven High Court judges.
The court only deals with matters of great importance, interpreting the Constitution and on occasions acting as a final court of appeal.
The former chief operating officer of FAI Insurances, Daniel Wilkie, successfully appealed to the High Court to link hearing of his appeal against his D&O insurers to that of the One.Tel directors.
Wilkie’s D&O insurers, Gordian Runoff (formerly GIO Insurance) and Markel at Lloyds London, had also refused to advance his defence costs in ASIC proceedings, relying on the dishonesty & fraud exclusions in its policy cover.
Justice Michael Kirby illustrated why he supported the High Court adjudicating on disputed D&O policies during the hearing of the appeals by the directors of One.Tel and the officer of FAI in September last year.
Kirby said he cared about the principle of the wording of a policy that is going to give “real protection in vulnerable circumstances” for people in Australia who are directors and officers of companies.
Kirby is an activist human rights advocate and has held numerous leadership positions for more than three decades including; foundation chair of the Law Reform Commission in the 1970s, president of the NSW Court of Appeal in the 1980s as well as director roles such as on the board of CSIRO.
The comments Kirby and fellow judges made during the appeals against D&O insurers reflect the more open approach by judges nowadays.
“If you look at the judgments of the High Court today, they do reveal discussion of policy questions which, in the past, was often missing from the text,” said Kirby in an interview last year (see www.hcourt.gov.au).
Indeed it is not only in judgments where policy issues are aired but in the banter and robust debate between judges and legal counsel during the hearing of cases, and during discussion about whether the High Court will grant applications for special leave to appeal.
Forthright observations and comments made about D&O insurance policies, about insurers’ motivations and the situation of directors and officers paint a fascinating picture for directors to contemplate as they consider the efficacy of their D&O cover.
Justice Callinan repeatedly raised a conflict of interest arising between an insurer and the directors and officers insured under a D&O policy when litigation involves an allegation of dishonesty. This puts an insured in a “terrible position”, he says.
“It gives the insurer the same interest as the plaintiff (the D&O policy holder), so the person who is supposed to be being cocooned by the insurer is, in fact, having the same assault made from two directions: by the plaintiff and by its own insurer,” he observed at the time the court was weighing up whether to grant the former One.Tel directors special leave to appeal.
Justice Kirby criticised insurers for the way D&O policies were written. On one occasion as legal counsel for CGU attempted to explain the construction of its D&O policy cover by reference to this clause and that clause – Justice Kirby pointed out an inconsistency with yet another clause.
“We accept that ...” , responded Tom Bathurst, CGU legal counsel.
Justice Kirby continued, “this was not even a plain English policy”.
“They are always a contradiction in terms” responded the legal counsel, deflecting the jibe.
He has explained that when a D&O policy was open to two interpretations, the High Court says that, you have to “concentrate on the words, you have to try and use purpose, structure, logic and so on, and only if it is intractable do you then use the contra proferentem type principle.”
The contra proferentem is applied to American cases. Where insurance policies are open to two interpretations, the meaning is interpreted in favour of the insured.
Justice Callinan advanced his own theory as to why an insurance policy might be written to thwart easy understanding. “No doubt” the insurer (CGU) has drawn the policy in such a way as to “sell lots of policies”. It might be a “very unattractive policy” if it means what the respondent (CGU) says it means ... a much less attractive business proposition.
At one point Justice Kirby inquired about the cost of the D&O premium for One.Tel’s cover. “They are not cheap,” said Justice Callinan. For the first $20 million of cover, the premium was $17,480, for an additional $10 million worth of cover, the premium was $57,000, explained the legal counsel for the former One.Tel directors.
The limit of liability applying to all directors and employees of One.Tel was $30 million in one year. By contrast FAI’s D&O liability limit was set at $20 million.
Insurers are loath for companies to disclose liability limits, claiming such actions could attract litigation and attempting to tie down companies to confidential agreements.
The importance to directors and officers of securing legal fees to defend litigation was underlined by the legal counsel to the former directors of One.Tel. He said $7 million of legal fees were spent in the Baycorp case and yet the D&O insurer had refused to fund defence proceedings (for a different set of reasons to the insurers involved in the One.Tel. and Wilkie/FAI situations.)
When insurers do stump up defence costs for directors, Callinan says they still want some “measure of control” and the best ways of exercising that control is by “controlling the money flow”.
The court transcripts offer scores of nitty-gritty insights into D&O policies as well as the “big picture” flavour of judges’ opinions towards D&O insurers and “vulnerable” directors.
Why bother? Because your personal assets will be on the line if your D&O insurer refuses your claim for indemnity when it comes to the crunch of a claim for legal defence costs. (take “the D&O reality test”; in accompanying story).
At first skim, the D&O case transcripts present as a mishmash of jargon. Phrases such as – “the fraud exception”, “the dishonesty exclusion”, references to the “proviso” and to particular clauses – pepper discussion around D&O policy construction.
Unintelligible? Or the technical language of an industry sector that challenges easy understanding by “outsiders”.
As you read and re-read D&O case transcripts, mentally noting the words and phrases that repeatedly arise, you begin to understand the language. Importantly, you can start to form your own perspective on the crucial elements of D&O policies.
Whether you want to have a look at the court cases or not, the only way to avoid being caught between a rock and a hard place is to become sufficiently familiar with important elements in D&O policies to:
(a) assess whether your adviser is really an expert in D&O insurance;
(b) understand in whose best interests the adviser is working – individual directors, the board as a whole, the organisation;
(c) ask the right questions of your D&O adviser; and
(d) make a decision in your personal best interests rather than settling for a “one size fits all” solution.

Many D&O cases are available from  the Australasian Legal Information Institute (www.austlii.edu.au).
Enter in the search box the terms:
Silbermann v CGU, then Wilkie v Gordian Runoff.
The Silbermann search brings up 10 cases, the Wilkie search three cases (some are duplications).

The AICD has recognised the dilemma surrounding D&O insurance and is building a website to help members (see separate story)