Defending may include going on the attack (just not this time)

Hird v Chubb Insurance Company of Australia Ltd [2016] VSC 174

In this Supreme Court decision, Hargrave J confirmed that an Insured’s proactive conduct may constitute reasonable defensive action covered under the Defence Costs extension of a D&O Policy, depending (as always) on the Policy’s wording. However, James Hird could not establish that his Federal Court action seeking declaratory relief against ASADA was causally linked to the Defence Costs extension.

Background

The facts are reasonably well known.

The AFL conducted an investigation within its powers regarding potential breaches of the AFL Anti-Doping Code. ASADA joined with the AFL in carrying out those investigations. Subsequently the AFL charged Mr Hird with bringing the game of football into disrepute. Mr Hird and the AFL settled those charges on the basis that he agree to a 12 month suspension as Senior Coach of Essendon. The AFL acknowledged that no breaches of the Anti-Doping Code had been established.

On 12 June 2014, ASADA served show cause notices on 34 Essendon players (but not James Hird).

The following day, Mr Hird and Essendon Football Club issued proceedings in the Federal Court seeking declaratory relief that the show cause notices were invalid on the basis that the information was obtained outside ASADA’s own statutory powers. Mr Hird also sought an injunction preventing ASADA from serving a show cause notice on him.

Middleton J in Essendon Football Club v ASADA (2014) 227 FCR 1 found that the show cause notices were not invalid, and dismissed Mr Hird’s claim for an injunction. This was upheld on the appeal brought by Mr Hird (but not Essendon): Hird v Chief Executive Officer of the Australian Sports Anti-Doping Authority (2015) 227 FCR 95.

James Hird sought from Chubb his costs in bringing the Federal Court proceeding and appeal, as well as his liability to pay the Respondents’ costs (‘the challenge costs’).

The Policy

In seeking to recover the challenge costs, Mr Hird relied on two insuring clauses in the Policy. First, Insuring Clause (A) stipulated:

‘Executive Liability Coverage

[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.

‘Loss’ was defined to mean:

‘the amount which an Insured becomes legally obligated to pay on account of any covered Claim including, but not limited to:

• Defence Costs;
• Legal Representation Expenses;

[…]

‘Executive Claim’ included in the Executive Liability Coverage was an important defined term in the Policy, because its meaning differed depending on the particular insuring clause relied upon. In respect of Insuring Clause A, it covered:

• ‘a written demand for monetary damages or non-pecuniary relief’; and
• ‘a formal administrative or formal regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document’

Hargrave J held that the AFL’s joint investigation with ASADA did not fall within this definition of ‘Executive Claim’ under Insuring Clause A. Until charges were laid, the AFL and ASADA ‘were merely investigating whether the Essendon Players and […] Mr Hird may have engaged in Wrongful Acts’.[1]

It followed, in effect, that the challenge costs in respect of the validity of the joint investigation were not covered under Insuring Clause A, because the joint investigation was not of itself an Executive Claim for that purpose.

Second, James Hird also sought the challenge costs by the cover provided under Insuring Clause C, which stipulated:

‘Legal Representation Expenses

[Chubb] shall pay, on behalf of each Insured Person, Legal Representation Expenses on account of any Formal Investigation commenced during the Policy Period.’

‘Executive Claim’ when Insuring Clause C operated, was, his Honour found, limited to a ‘Formal Investigation’, in contrast to a ‘formal […] proceeding’ provided for under Insuring Clause (A).

On Hargrave J’s interpretation, this Defence Costs extension set out in Insuring Clause C could cover court challenges to the validity of Formal Investigations such as the joint investigation brought by the AFL and ASADA. However, there had to be a necessary causal link, so that such costs were incurred ‘on account of’ any formal investigation.

His Honour acknowledged[2] that the following proactive steps would be covered under the Chubb Policy in respect of Formal Investigations:

• the Insured may challenge the validity of the Notice in court;
• the Insured may comply with the Notice, but subsequently form a reasonable basis to challenge the interview processes in court (for example there may be an alleged failure to accord procedural fairness); and
• the Insured may comply with the Notice, but subsequently seek relief from the court preventing the investigative body from using the information obtained for the purpose of it bringing an Executive Claim against the Insured.

Clearly this third purpose was very close to Mr Hird’s intention in bringing the Federal Court proceeding.

However, Mr Hird’s evidence was that he brought the Federal Court proceeding to protect his own reputation and his economic interests arising from the ASADA Notices having been served on the 34 players. Further, there was no evidence that information he provided to ASADA contributed to ASADA issuing show cause notices on the 34 players, nor was there evidence that any information he provided might lead to ASADA serving a show cause notice on him, or could assist ASADA in proving any anti-doping violations.

Hargrave J therefore held that cover was neither available under Insuring Clause (A) nor (C).

Lessons

The case turns on a close reading and interpretation of the Chubb Policy including the causal connection provided by the operative insuring clauses.

Here, with the benefit of hindsight, Hargrave J may have found differently if Mr Hird had sought defence costs that were limited to his seeking to restrain ASADA from using information it had obtained from him alone.

The case illustrates, once again, that in seeking to prove a claim under a Policy, it may be necessary to undertake a close analysis of causation, very often vital in determining whether the claim falls within the scope of cover purchased.

[1] At [56]

[2] At [104] – [109]