Federal Court of Australia

Evolution Precast Systems Pty Ltd v Chubb Insurance Australia Limited [2020] FCA 1690

ORDERS

THE COURT ORDERS THAT:

1.    In relation to the following question raised for determination:

Is Chubb presently obliged by Extension clause 4.1 of the Policy to pay Defence Costs:

(i)    that have been incurred by the Applicant; and

(ii)     as and when they are incurred by the Applicant,

unless and until there is:

…

(iv)    a judicial determination that Exclusion clause 3.13 applies?

      Answer, “No”.

2.    The applicant is to pay the respondent’s costs of the application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    On 30 October 2020, the Chief Justice made orders for the expedition of the hearing of a separate question in issue between the parties in these proceedings concerning the applicant’s entitlement to the payment of defence costs pursuant to a policy of insurance issued by the respondent, Chubb Insurance Australia Limited (Chubb). The relative urgency arises because the applicant, Evolution Precast Systems Pty Ltd (Evolution), is presently a cross-respondent in two significant pieces of litigation in the Supreme Court of New South Wales arising out of the damage sustained to the building known as “Opal Tower” in Sydney. It claims advance payment of the defence costs cover from Chubb in relation to those proceedings. For its part, Chubb has declined to make any payment of defence costs in relation to the action and asserts that it is not obliged to do so on the basis that the claims made against Evolution are not within the policy’s cover by reason of its professional liability exclusion.

The background facts and questions to be determined

The policy of insurance

2    It is not in dispute that Evolution entered into a Broadform Liability Insurance policy with Chubb (the Policy) on or around 1 February 2018 in respect of its liability for, inter alia, property loss arising in the course of its business in the period from 1 February 2018 to 1 February 2019. The policy limits were $20,000,000 per claim and in total. The insured’s business was identified in the policy schedule as being, “Principallly [(sic.)] Pre Cast Panel Manufacturer & Delivery, Installers, Property Owners and any other activity incidental thereto”.

3    The general insuring clause provided:

Insuring Agreement

1.1    Chubb shall indemnify the Insured against all sums which the Insured shall become legally liable to pay as Compensation in respect of:

a) Personal Injury

b) Property Damage

c) Advertising Injury

first happening during the Policy Period within the Policy Territory as a result of an Occurrence in connection with the Business.

4    Relevant to that clause are the following definitions:

2.4     Business means:

All activities and operations of the Business stated in the Schedule and that shall include: …

2.5     Compensation means

Monies paid or payable by judgment or settlement together with any liability on the Insured’s part to pay legal costs and expenses (other than Defence Costs).

2.7     Defence Costs means

All reasonable legal costs and expenses incurred by Chubb or by the Insured with the written agreement of Chubb:

a)     in defending or appealing a claim against the Insured; and

b)     for legal representation of the Insured at any coronial inquest or other fatal accident inquiry.

2.12 Occurrence means

An event including continuous or repeated exposure to substantially the same general conditions which results in Personal Injury or Property Damage or Advertising Injury neither expected nor intended from the standpoint of the Insured. All events of a series consequent on or attributable to one source or original cause are deemed one Occurrence.

2.19 Property Damage means

a)     physical damage to, destruction of or loss of tangible property including the loss of use thereof at any time resulting therefrom;

b)     loss of use of tangible property which has not been physically damaged or destroyed, provided such loss of use is caused by physical damage of other tangible property.

5    The exclusions section of the policy included the following:

Exclusions

This Policy does not indemnify the Insured or any third party beneficiary for any liability directly or indirectly caused by, arising out of or in any way connected with:

…

3.13 Professional Liability

the rendering of or failure to render professional advice or service by the Insured, but this Exclusion 3.13 only applies to:

a)     …; or

b)     professional advice or service given for a fee.

6    The Policy also provided a number of extensions which included the following:

Extensions

Each of the following Extensions automatically applies unless otherwise stated in the endorsements. Each Extension is, unless otherwise stated, subject to the Insuring Agreement and all other terms, exclusions and limitations of this Policy, including any applicable limit of liability.

4.1 Defence Costs

In respect of any liability for Compensation indemnifiable under this Policy, Chubb will pay Defence Costs, subject to the following:

a)     Chubb is not obliged to pay any Defence Costs or to defend any suit after the Limits of Liability has been exhausted;

b)     If a payment exceeding the Limits of Liability has to be made to dispose of a claim, the liability of Chubb for Defence Costs is limited to the proportion that Chubb’s liability to indemnify the Insured for Compensation under this Policy bears to that payment; and

c)     In the event of a claim being made against the Insured in any Court or before any other legally constituted body in the United States of America, Canada or their respective protectorates and territories, the total amount payable by Chubb in respect of any one Occurrence including Defence Costs will not exceed the Limit of Liability.

7    Clause 5.3 concerned the manner in which Chubb might exercise its right to defend claims against Evolution:

5.3     Right to defend, assistance and co-operation of the Insured

a)     In respect of any Occurrence covered under this Policy, Chubb has the right, if it so elects, to defend any suit against the Insured seeking Compensation or reimbursement of expenses for an Occurrence and to bring any cross claim in the name of the Insured even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient; but Chubb is not obligated to pay any claim or judgment or to defend any suit after Chubb’s liability under this Policy in respect of the claim has been exhausted.

b)     If the cost of any Occurrence and Defence Costs are not likely to exceed the Deductible, Chubb may elect not to defend the suit. In these circumstances and, subject to the provisions of this Policy, the Insured is responsible for the handling and payment of the claim and its Defence Costs up to the amount of the Deductible.

c)     The Insured must co-operate with Chubb and comply with the terms and conditions of this Policy, and assist as necessary in enforcing any right to contribution or indemnity from any person, corporation or organisation.

The Opal Development and the making of claims

8    On around 29 October 2015, the building company, Australia Avenue Developments Pty Ltd (AA Developments) entered into a contract with Icon Co (NSW) Pty Ltd (Icon) pursuant to which Icon agreed to design and construct a high rise, mixed residential and commercial development known as Opal Tower Development at Sydney Olympic Park (the Opal Tower Development).

9    On 31 August 2016, Icon and Evolution entered into a subcontract pursuant to which Evolution agreed to provide pre-cast concrete works, including design, manufacture and installation services for pre-cast wall panels in relation to the Opal Tower Development. That agreement is referred to in these reasons as the “Evolution Subcontract”. Evolution performed its obligations under that agreement in the period between September 2016 and November 2017.

10    It is a matter of public knowledge that in around late 2018 some not insignificant cracking commenced or was first observed in the structure of the Opal Tower Development, which resulted in the evacuation of its residents.

11    On 27 February 2019, AA Developments and its parent company, Ecove Pty Ltd, commenced an action in the Supreme Court of New South Wales against Icon and others for loss and damage arising from the cracking. This is referred to as the “Developer Proceedings”. One of the defendants in the action was WSP Structures Pty Ltd (WSP), which had been the structural and civil consulting engineers engaged by Icon in relation to the project.

12    Subsequently, on 26 July 2019, Terry Walter Williamson and Helen Therese Williamson commenced a separate proceeding, also in the Supreme Court of New South Wales, against the Sydney Olympic Park Authority. That action was brought on their own behalf and as a representative proceedings under Part 10 of the Civil Procedure Act 2005 (NSW) on behalf of other persons who owned one or more units in the Opal Tower Development as at 24 December 2018. Those proceedings are referred to as the “Representative Proceedings”. WSP is also a defendant in those proceedings.

13    On 9 August 2019, WSP filed a cross-claim against Evolution in the Developer Proceedings seeking, inter alia, indemnity, contribution or damages for any liability which it might have to Icon in that action. It also filed a cross-claim against Evolution in the Representative Proceedings on 20 December 2019, seeking similar relief.

14    Likewise, Icon filed a cross-claim against Evolution in the Representative Proceedings on 20 March 2020, seeking indemnity or damages for loss which it claimed to have suffered in connection to the damage to the Opal Tower Development, including any liability which it might have to the plaintiffs in that action. On 9 April 2020, it made a similar cross-claim against Evolution in the Developer Proceedings.

15    Evolution made a claim on Chubb under the Policy for payment of its reasonable defence costs as they are incurred in defending the cross-claim in each action.

16    Chubb has accepted that the cross-claims against Evolution as they are formulated fall within the broad ambit of clause 1.1 of the Policy, being the Insuring Agreement, but asserts that each is excluded by the professional liability exclusion in clause 3.13. It therefore denies that the policy responds to the claim and, consequently, that it is obliged to pay Evolution’s defence costs, either until the veracity of its declinature is determined or at all.

The agreed question

17    The question which has been agreed upon between the parties is as follows:

In circumstances where:

 1.    The Applicant is an Insured under the Policy;

2.    On 9 August 2019, the Applicant was joined to the Developer Proceedings by cross-claim brought by WSP;

 3.     The Applicant notified Chubb of that cross-claim by WSP;

4.    In August 2019, Chubb appointed solicitors, Gilchrist Connell, to act for the Applicant in the Developer Proceedings on a reservation of rights basis while it investigated whether WSP’s cross-claim fell within the scope of the Policy;

5.    By letter dated 21 November 2019 (Crittenden 10/9/20, p 366), Chubb communicated to the Applicant that:

a.    it accepted that WSP’s cross-claim in the Developer Proceedings fell within the Insuring Clause of the Policy; and

b.    its position was that WSP’s cross-claim in the Developer Proceedings was excluded from cover under the Professional Liability Exclusion (clause 3.13) of the Policy and on that basis it was unable to indemnify the Applicant in respect of that claim (but, also, that Chubb’s declinature should not be seen as limiting its entitlement to decline indemnity on the basis of other provisions of the Policy including other Policy exclusions);

6.    Following that letter, Chubb ceased providing instructions to Gilchrist Connell and did not accept responsibility for their costs;

7.    By letter dated 3 December 2019 (Crittenden 10/9/20, p 378), Chubb communicated to the Applicant that:

  a.    it had reviewed its declinature of indemnity; and

b.    its position remained that WSP’s cross-claim in the Developer Proceedings was excluded from cover under the Professional Liability Exclusion (clause 3.13) of the Policy, and for that reason it was unable to indemnify the Applicant in respect of that claim (but, also, that Chubb’s declinature should not be seen as limiting its entitlement to decline indemnity on the basis of other provisions of the Policy including other Policy exclusions);

8.    On 20 December 2019, WSP filed a cross-claim against Evolution in the Representative Proceedings;

 9.    The Applicant notified Chubb of the filing of that cross-claim by WSP;

10.    By letter dated 22 January 2020 (Crittenden 10/9/20, p 387), Chubb communicated to the Applicant that its Internal Dispute Resolution Service had reviewed, and agreed with, Chubb’s determination that the Professional Liability Exclusion applied to WSP’s crossclaim in the Developer Proceedings, for the reasons set out in its letters dated 21 November 2019 and 3 December 2019 and, accordingly, that the Applicant was not entitled to be indemnified under the Policy in respect of WSP’s cross-claim in the Developer Proceedings;

11.    By letter from its solicitors dated 28 February 2020 (Crittenden 10/9/20, p 391), the Applicant:

a.    stated that it assumed Chubb’s stated position applied to WSP’s cross-claim in the Representative Proceedings;

b.    requested that Chubb review its decision on indemnity under the Policy; and

c.    requested confirmation of cover, including for its defence costs for WSP’s crossclaims;

12.    On 20 March 2020, Icon filed a cross-claim against Evolution in the Representative Proceedings;

13.    On 9 April 2020, Icon filed a cross-claim against Evolution in the Developer Proceeding;

 14.     The Applicant notified Chubb of the cross-claims filed by Icon;

15.     By letter from its solicitors dated 22 May 2020 (Crittenden 10/9/20, p 406), Chubb stated that it:

a.    remained firmly of the view that the Professional Liability Exclusion in clause 3.13 of the Policy applied to exclude the claims against the Applicant; and

  b.    maintained its declinature of indemnity under the Policy;

16.    On 29 June 2020, the Applicant commenced this proceeding against Chubb in reliance upon Extension clause 4.1 of the Policy and seeking declaratory relief and damages relating to its costs and expenses of defending the Claims;

17.    It remains the case that Chubb does not dispute, that if the Applicant is found to be liable under the Claims to pay Compensation (as defined in the Policy), the liability will be of a character that satisfies the requirements of Insuring Clause (clause 1.1) of the Policy,

then, upon the proper construction of the Policy and by reason of s 54(1) of the Insurance Contracts Act 1984 (Cth):

Is Chubb presently obliged by Extension clause 4.1 of the Policy to pay Defence Costs:

   (i)    that have been incurred by the Applicant; and

(ii)     as and when they are incurred by the Applicant,

unless and until there is:

   (iii)     both:

(A)    a liability for the Claims ascertained by judgment, award or settlement; and

(B)    a judicial determination that the liability so established is excluded from cover under the Policy by operation of Exclusion clause 3.13;

or,

   (iv)    a judicial determination that Exclusion clause 3.13 applies?

Definitions

Policy means the Broadform Liability Insurance Policy numbered 02CL018969 issued by Chubb for the period 1 February 2018 to 1 February 2019, both days at 4.00pm Melbourne standard time.

Chubb means the Respondent to this proceeding.

Claims means the cross-claims brought against the Applicant by WSP and Icon in the Developer Proceedings and the Representative Proceedings.

Defence Costs means reasonable legal costs and expenses the Applicant has incurred and will incur in defending the Claims.

Developer Proceedings means the case numbered 2019/64406 in the Supreme Court of New South Wales.

Icon means Icon Co (NSW) Pty Ltd.

Representative Proceedings means the case numbered 2019/232749 in the Supreme Court of New South Wales.

WSP means WSP Structures Pty Ltd.

18    In the course of the hearing of the application, Mr Williams SC for Evolution acknowledged that it was not necessary for the Court to deal with the alternative issue specified in subparagraph (iii) of the separate question. That included subparagraph (A) relating to whether Chubb was obliged to pay defence costs until Evolution’s liability on the cross-claims was established by judgment award or settlement. It was submitted that it was sufficient for the Court to answer the question based on subparagraph (iv) alone. As a result, the question before the Court is confined to determining whether Chubb is presently obliged to pay Evolution’s defence costs unless and until there is a judicial determination that exclusion clause 3.13 applies.

Consideration

19    The essential dispute between the parties is of a not uncommon nature. The Chubb Policy contains a promise by Chubb to pay defence costs, although there is no express undertaking to pay them “in advance” or “up front” and it presently denies any obligation to do so. Nevertheless, the two actions in the Supreme Court of New South Wales are continuing and Evolution seeks a reliable source of funds for the costs of its legal representation in defending the cross claims. It says that it is entitled to receive payment of such costs from Chubb until there has been a judicial determination as to Chubb’s obligations under the policy.

20    As at this time, it is of course uncertain whether Evolution will be liable to one or more of the third parties or, if it is, whether its liability will be covered by the Chubb Policy. In these circumstances, the essence of the issues between the parties is when, if at all, Chubb is obliged to pay the costs and expenses incurred by Evolution in defending the claims against it.

The general scope of the contending submissions

21    The operative words of the defence costs clause are, “In respect of any liability for Compensation indemnifiable under this Policy, Chubb will pay Defence Costs”, and of that it is the first eleven words upon which most attention was focused. From that clause, as informed by the definitions of the defined terms used in it, and by reference to the word “indemnifiable”, the parties contend that the occasion for and timing of the performance by Chubb of its obligation to pay defence costs can be identified. They, of course, disagree as to what that occasion is.

22    There is no need in this case to consider whether the defence costs clause is tightly confined to those circumstances where the insured is actually liable to the third party claimant (as was advanced by the insurers in Fitzpatrick v Job (2007) 14 ANZ Ins Cas 61-731 (Fitzpatrick v Job); Sherlex Pty Ltd v Thornton [2003] QCA 461 and Wesfarmers Federation Insurance Ltd v Wells [2008] NSWCA 186; see also the discussion in the successive editions of MacGillivray on Insurance Law, in particular see Birds J, Lynch B, Paul S, MacGillivray on Insurance Law (14th ed, Thomson Reuters, 2018) p 1026, 30-051). Chubb acknowledges that, prima facie, the clause may operate when a claim is brought against Evolution which, either by reason of the manner of its formulation or by its substance, comes within the general insuring clause. However, it submits that the insuring clause is qualified by the professional liability exclusion and is triggered only if Evolution’s putative liability to a third party is not within its scope. It further submits that it has no additional obligation to meet Evolution’s legal costs and expenses of the current proceedings pending any adjudication of whether that exclusion operates to deny indemnity in respect of the claims made in the Developer Proceedings or the Representative Proceedings.

23    Evolution’s submissions differ by reference to the temporal operation of the defence costs clause. It submits that the clause commences to have effect when a claim is made against it which, if it were successful, would be within the scope of the insuring clause. So the argument goes, this is sufficient to trigger Chubb’s obligation to pay defence costs which continues unless and until it is established by curial determination that the exclusion relied upon by Chubb applied in the particular circumstances. In particular, Evolution sought to draw parallels between the present matter and the decision of the High Court in Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 (Wilkie v Gordian Runoff Ltd), where the policy’s provisions deferred the operation of an exclusion clause until the facts underpinning it were admitted or determined by adjudication. The relevance of this decision is discussed in detail below.

Some brief principles on the construction of insurance policies

24    There was no dispute between the parties as to the principles relevant to the construction of insurance policies. They were concisely stated by the Full Court in Onley v Catlin Syndicate Ltd (2018) 360 ALR 92 at 100 – 101 [33]:

The Applicants’ arguments before this Court concern the interpretation of the Advancement Extension in the context of the policy and, to some degree, the existence of an implication preventing the insurer from exercising its entitlements under s 28. Such arguments call for the application of the well-established principles concerning the construction of policies of insurance as commercial contracts. Those principles were not in dispute between the parties. Necessarily, a policy of insurance is assumed to be an agreement which the parties intend to produce a commercial result: Electricity Generation Corporation (t/as Verve Energy) v Woodside Energy Ltd (2014) 251 CLR 640; 306 ALR 25; [2014] HCA 7 at [35]: as such, it ought to be given a businesslike interpretation being the construction which a reasonable business person would give to it: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 343 ALR 58; [2017] HCA 12 (Ecosse Property Holdings) at [17]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; 339 ALR 200; [2016] HCA 47 at [78]; Todd v Alterra at Lloyd’s Ltd (on behalf of underwriting members of Syndicate 1400) (2016) 239 FCR 12; 330 ALR 454; 112 ACSR 1; [2016] FCAFC 15 at [42]; Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100 at [52]. The contract is naturally enough interpreted, in a temporal sense, as at the date on which it was entered into: Ecosse Property Holdings at [16] per Kiefel, Bell and Gordon JJ; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; 325 ALR 188; [2015] HCA 37 (Mount Bruce Mining) at [47]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; 211 ALR 342; [2004] HCA 52 at [40]. The Courts frequently have regard to the contextual framework in which a contract is formed, to the extent to which it is known by both parties, to assist in identifying its purpose and commercial objective: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; 176 ALR 711; [2000] HCA 65 per Gleeson CJ at [22]; Mount Bruce Mining at [47]; Franklins Pty Ltd v Metcash Ltd (2009) 76 NSWLR 603; 264 ALR 15; [2009] NSWCA 407 per Allsop P at [19]. It goes without saying that a construction that avoids capricious, unreasonable, inconvenient or unjust consequences, is to be preferred where the words of the agreement permit.

25    It is appropriate to add that ascertaining the commercial purpose of the agreement and obtaining an appreciation of its purpose or objects is facilitated by an understanding of “the genesis of the transaction, the background, the context [and] the market in which the parties are operating”: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 – 657 [35], citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350, citing Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570, 574. Indeed, this principle may apply with substantially more force in relation to insurance policies than in other areas of commerce.

Are the claims against Evolution in respect of any liability for Compensation indemnifiable under the Policy?

The claims are within the scope of the general insuring clause

26    The parties were agreed that a primary requirement for the operation of the defence costs clause was the existence of a claim against the insured which came within the general insuring clause in clause 1.1. This is necessarily required by the circumstances on which the defence costs extension is conditioned, namely, “in respect of any liability for Compensation indemnifiable under this Policy”, and although the parties differed as to the full meaning of “indemnifiable”, there was consensus that, at least, it required the existence of a claim against the insured which, if it were successful, would fall within the general insuring promise. The parties also appeared to be in agreement that, although relevant, the manner in which the claim against the insured was formulated was not determinative, and it was sufficient if the substance of the claim was within the scope of the insuring clause. In Major Engineering Pty Ltd v CGU Insurance Ltd (2011) 35 VR 458 (Major Engineering v CGU), Bongiorno JA referred to the liability asserted by the third party claimant against the insured as a “notional liability”. Mr Jones SC adopted the use of that expression in the course of submissions and it is similarly adopted for the purposes these reasons.

27    On the facts advanced for the purposes of the separate question it was agreed that Evolution’s notional liability in relation to the Developer’s Proceedings and the Representative Proceedings were within the scope of the liability covered by the Insuring Agreement in clause 1.1. See items 5a and 17 of the circumstances supporting the agreed questions.

Does “indemnifiable” require consideration of the operation of exclusion clauses?

28    To a degree, Evolution accepts that the concept of a liability which is “indemnifiable” requires a consideration of the operative effect of the policy’s exclusion clauses: see in particular paragraph 26 of its written submissions. The essential point of departure was its submission that until there has been a curial determination of whether an identified exclusion clause excluded cover under the policy, the defence costs clause obliges Chubb to meet its legal costs. Although in this respect it asserts that clause 4.1 used the expression “indemnifiable” (meaning capable of being indemnified) as opposed to “indemnified” (meaning actually within the indemnity), it appears that it sought most support for its submission from Chubb’s obligation to “pay” defence costs and from the terms of the definition of “Defence Costs”, as opposed to the terms of clause 4.1.

29    Mr Jones SC, on behalf of Chubb, submitted that the word “indemnifiable” referred to a liability that is both within the general insuring clause, in the sense that the insured has a notional liability to the third party, and is not excluded by the operation of an exclusion clause: see a similar use of the word by Meagher JA in Allianz Australia Insurance Ltd v Certain Underwriters at Lloyd’s of London Subscribing to Policy Number B105809GCOM0430 [2019] NSWCA 271 [74]. There is force in this submission. In general terms, the ascertainment of the scope of liability cover provided by the policy requires a consideration of both the insuring clause and the exclusions. It is a basic rule of construction that the policy must be read as a whole. That is made clear in this case by the introductory words of the Policy Wording to the effect that the agreement is subject to the terms, conditions and limitations of the policy. It is also made clear by the introductory words to the exclusions section which state that the “Policy does not indemnify the Insured… for any liability directly or indirectly caused by, arising out of or in any way connected with” the matters enumerated therein. On its face it would seem to be unusual to construe the word “indemnifiable” inconsistently with these indicators such that the insured’s relevant notional liability was only required to be within the scope of the general insuring clause.

30    In response, Mr Williams SC for Evolution submitted the exclusion clauses do not “directly” impact upon the operation of the defence costs clause because they are only referable to Chubb’s obligation to provide an indemnity. So, the submission went, clause 4.1, by its terms, requires Chubb “to pay” defence costs and there is no suggestion of an indemnity being granted in relation to those expenses. On that basis, an exclusion clause limiting Chubb’s obligation to indemnify leaves the obligation in clause 4.1 undisturbed. Whilst it can be accepted that the policy’s exclusions do not directly impact upon Chubb’s obligation to make payments which are not in the nature of an indemnity, the exclusions do have an indirect effect on the operation of the obligation in clause 4.1. That arises by use of the expression “indemnifiable” which necessarily directs attention to the scope of the indemnity provided by the policy. Where, as here, that includes both the Insuring Agreement and the exclusions, if a relevant exclusion applies in the circumstances it will necessarily prevent the clause from operating.

31    On the ordinary meaning of the wording of the Chubb Policy, the construction ascribed by Chubb to the word “indemnifiable” as it is used in clause 4.1 should be accepted. Importantly, “indemnifiable” is used as the touchstone for Chubb’s obligation to pay defence costs such that, on its construction, it is only obliged to pay them in relation to claims which, if successful, will come within the Insuring Agreement and are not the subject of an exclusion. In those circumstances the notional liability is capable of indemnification under the policy and will be indemnified if the Third Party’s claim succeeds. This results in a sensible commercial construction, that the provision of defence costs will be confined to those claims against the insured which would be indemnified, if the third party established their cause of action. Whilst uncertainty remains as to whether there will be a liability to be indemnified under the policy, the defence costs are applied to support the mutually beneficial outcome of defeating the third party’s claim, but only if the insurer would be liable to provide indemnity. Absent that liability, there would be no benefit to the insurer, and if the insured sought to have the indemnity for costs without cover for third party liability, an unusual situation, or wished to have it advanced despite the insurer’s challenge to the cover, that benefit could have been purchased specifically.

32    The construction advanced by Evolution involves some difficulties. For instance, it would be an unusual interpretation that results in the insured’s notional liability being regarded as “indemnifiable” or capable of being indemnified when it has engaged an exclusion. Ex hypothesi, it is never capable of being indemnified. It also has the further difficulty that it would result in the notional liability’s being “indemnifiable” when the parties are in dispute about an operative exclusion clause though not indemnifiable if the insured rightly accepted the insurer’s assertion that it applied. It is unlikely that the parties intended that the operation of the defence costs clause was dependent upon the insured’s attitude, advanced in good faith or otherwise, to the insurer’s rightful invocation of an exclusion clause. That would be commercially unrealistic but it is the necessary consequence of Evolution’s submissions.

33    Evolution’s construction requires the word, “indemnifiable”, to do a lot of work. Whereas, in the initial stage (being prior to the resolution of the rights between the insured and insurer) it would refer to a claim for which there is notional liability to the third party, once it is determined that an exclusion applies, it means that the notional liability must not be within an exclusion. To put it another way, its construction ascribes to it a description of a liability which is within the general insuring clause unless and until there is a judicial determination or an agreement between the parties that an exclusion applies.

34    The construction advanced by Chubb avoids these difficulties. On its construction, its obligation arises when the insured has a notional liability within the insuring promise and no exclusion clause operates to change that. Whilst, in some cases, there may be some uncertainty as to whether the insurer’s assertion of an operative exclusion clause is correct, on Chubb’s interpretation it will not be obliged to pay the costs of litigation which will only inure for the benefit of the insured because it is in respect of a claim not covered by the policy.

35    As Mr Jones SC quite correctly submitted, the operation of a defence costs clause in the above manner is far from unusual. In Major Engineering v CGU, the relevant clause provided “In the case of … a claim of Public Liability or Products Liability being made against You … for which indemnity is, or would be, available under this Policy, We will pay Your Legal Costs”. As it was, the insured had successfully defended a third party claim which had been brought against it, although the costs which it incurred had been considerable and it sought recovery of the amount from the insurer. The dispute involved, in part, whether the claim which had been brought against the insured was within the scope of the policy as being one “for which indemnity … would be available”. Bongiorno JA (at 466 [27]) (with whom Hansen JA and Kyrou AJA agreed) held that, in order for the defence costs extension to apply, the insured had to establish that the third party’s claim, being either as formulated or by its true nature, was one which, if successful, would engage the indemnity. That was an issue different from the issue here, but his Honour added (at 470 [42]) that in order for a liability to be one for which indemnity was available under the policy, it had to be one for which indemnity was not excluded. On the facts before the Court, the insurer had not discharged its onus of establishing that any of the relevant exclusions on which it had relied were applicable, such that the claim was one in respect of which the defence costs extension applied.

36    The import of this is that the basis on which the defence costs clause was held to operate was consistent with that which Chubb submits should operate in the present case. That is, it is engaged only where the insured’s notional liability is not excluded from cover by any exclusion clause. That is not to conflate the wording from the two policies, albeit that they have similarities, but simply to observe that Chubb’s interpretation does not result in an uncommercial operation.

37    Chubb also relied upon the decision in Fitzpatrick v Job. In that case the relevant legal costs extension provided, “In addition we will also pay legal costs, charges and expenses incurred as a result of your entitlement to indemnity under this Optional Benefit and incurred with our written consent.” Pullin JA held (at [178]) that the clause imposed an obligation on the insurer to pay defence costs if the claims made against the insured were of a kind which, if established, would entitle it to indemnity under the policy. Similarly, in Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance (2018) 359 ALR 314, Meagher JA (at 316 [6]) construed the defence costs extension which applied “in relation to a claim covered under this Policy” as requiring that the third party’s claim against the insured was both within the insuring clause and not within an exclusion clause. Again, whilst acknowledging the different policy wordings, there is a consistency in the operation of the clause with that under consideration in this matter.

38    In this context, Mr Williams SC for Evolution relied upon the decision in Karenlee Nominees Pty Ltd v ACN 004 312 234 Ltd (1994) 8 ANZ Ins Cas 61-236 (Karenlee Nominees). There, the insurer asserted that the defence costs extension responded only where there existed an actual liability of the insured to a third party to which the policy responded. A claim had been made against the insured for property damage but had ultimately failed. Hedigan J held that the third party’s claim fell within the general insuring clause providing cover for legal liability for compensation in respect of property damage, and that the policy exclusions which applied to the indemnity for liability to pay compensation were irrelevant to the insurer’s obligation to pay defence costs with the result that the defence costs extension applied. Mr Williams SC’s submission that the clause in the present matter operated in a similar manner should be rejected. In Karenlee Nominees, the defence costs extension was in somewhat expansive terms and provided that “GRE will pay all law costs, charges and expenses incurred …by … the insured … in settlement or defence of claims for compensation”. It is apparent that the operation of that extension was conditioned upon the making of a claim for compensation and not, as in the present case, upon the existence of an asserted liability which, if established, will entitle the insured to indemnity under the policy. The decision cited does not assist in the resolution of the issues before this Court.

39    Mr Williams SC submitted that the use of the word, “indemnifiable” as distinct from “indemnified” was significant and supported Evolution’s construction. The simple response lies in the recognition that it was used in respect of the promise to indemnify for putative costs in respect of putative liability which may only possibly be incurred. In that case, it was logically appropriate to speak in the hypothetical, “indemnifiable”. Further, the expression must be read as a whole, being “indemnifiable under this Policy”. Relevantly, the word “indemnifiable” is not limited by reference to “indemnifiable under the general insurance promise.”

The insurer’s onus to prove the operation of an exclusion clause

40    Also in the context of this issue, Mr Williams SC submitted that Evolution’s preferred construction of “indemnifiable” was congruent with the insurer’s well known onus of proof or risk of non-persuasion with respect to an exclusion clause: Major Engineering v CGU, 470 [47] per Bongiorno JA. In effect, the submission was that, given that onus, the insurer ought not to be entitled to rely upon an exclusion until it has established an entitlement to do so by a judicial determination. In other words, the insurer is required to perform its obligations under the policy if a claim was made which fell within the insuring clause, and continue to do so until it obtains a determination that the exclusion clause operated. Albeit an argument with some superficial attraction, if not only for its ingenuity, it cannot be accepted. The onus borne by an insurer is concerned with its evidential and persuasive onus in adjudicative proceedings between it and the insured in relation to their respective rights. It does not exist to create some free-standing obligation on an insurer who wishes to rely upon an exclusion to seek a determination of its rights and, in the mean-time, to perform the policy despite having no legal obligation to do so. It is entitled to stand on its rights, as it sees them, and to bear the appropriate onus should the insured seek to enforce its rights, as it sees them. Nor in that respect does the onus affect the construction of the relevant provision, the contractual terms on which the obligation to pay defence costs rests, nor the meaning of the expressions used. The issues do not intersect.

Is the defence costs extension the same as a duty to defend?

41    Evolution also sought to equate the operation of the defence costs clause to that of clauses which impose a duty to defend on the insurer. In particular, it relied on the observations of Allsop CJ in Australasian Correctional Services Pty Limited v AIG Australia Limited [2018] FCA 2043 [37] (Australasian Correctional Services v AIG). There, the Chief Justice considered the scope of the insurer’s obligations pursuant to a clause imposing a duty to defend and, in doing so, said (at [37]):

It is a not unusual feature of liability litigation that claims against the insured in a suit may contain claims that are covered and claims that are not covered by relevant liability policy. One response to the difficulties that can arise from such circumstances can be to place the contractual responsibility on the insurer to defend the suit and pay all expenses of that defence of the whole suit. That is what occurred here. In such a clause, the duty to defend is broader, and differently expressed, to the obligation to indemnify. The duty to defend arises and attaches until there is no basis for considering that the cover responds to any claim. The duty to defend is the provision of a service, not the granting of indemnification of third party liability. For that reason it is not necessarily logically connected with, or limited by, the structure of the indemnity for liability. It is controlled by the words of the contractual responsibility to defend. The responsibility is to defend a suit; that some allegations forming part of the suit may not be covered by the policy must often be a real possibility. There is no apparent reason to lessen or qualify the unambiguous operation of the obligation to defend the suit and pay all expenses in so doing, unless the words of the policy require it.

(Emphasis added).

42    The relevant clause in that case required the insurer to “Defend in their name and on their behalf any suit against the Insured alleging such Personal Injury or Property Damage and seeking damages on account thereof, even if such suit is groundless, false or fraudulent”. The point in issue and the description of the trigger to defend was different in terms and purpose from the issue here. It is apparent that the trigger of the insurer’s obligation to defend was the bringing of a suit and not the assertion of a liability which, if successful, would be indemnifiable under the policy. This is entirely consistent with the Chief Justice’s observations in the quoted passage and, especially, those emphasised. The particular clause in that case (and duty to defend clauses generally) is of a nature substantially different from that presently under consideration. The duty to defend is, as his Honour observed, the provision of a service which commences with the bringing of a requisite claim against the insured and, usually, continues until the insurer is able to “confine” the claim outside the coverage: citing John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] Lloyd’s Rep IR 420, 451 [32]. In essence, the insurer’s obligation is the provision of first party litigation insurance for specified claims such that, even if the claim fails and is, therefore, not within the scope of that cover, the insurer’s obligation remains. But if the claim is outside the litigation cover because it is limited to indemnifiable compensation under a third party claim, and it is not indemnifiable because it is excluded from the cover, the insurer’s obligation does not arise. The observations of the Chief Justice were addressed to a situation where the obligation had been triggered because some claims were within the cover. If there were none, the obligation would not be triggered at all. That is manifest, and there is no reason why the absence of cover should not be attributable to an exclusion as well as to the insuring promise. Classically, exclusions shape the cover by modifying the broad insuring promise, and the two are not to be artificially dissociated. The necessary consequence of that is that reimbursement of the costs expended is not usually available for the insurer if it transpires that the claim made is outside of the cover.

Temporal indicators as to the payment of defence costs?

43    It was submitted on behalf of Evolution that when the terms of the definition of “Defence Costs” were read into and with clause 4.1, the clause, taken as a whole, necessarily implied that Chubb was obliged to pay Evolution’s expenses of defending any claim as the action progressed and that obligation remained until a curial determination that an exclusion applied in respect of the third party’s claim. This submission conflates two issues. The first is the timing of the performance of Chubb’s obligation to pay defence costs. The second is whether the policy imposes any superadded duty on Chubb to make payments which it disputes, even with full justification, until its denial of the obligation to pay is adjudicated.

44    In relation to the first issue it can be accepted that the definitional terms of “Defence Costs” do indicate that, if and when clause 4.1 applies, Chubb’s obligation is to pay Evolution’s legal costs and expenses as they are incurred in the course of the litigation. That is the position irrespective of the presence of the words, but that temporal issue depends on the insurer’s liability to indemnify at all. When it should pay is a different and later issue from whether it should pay at all. So this issue is inconsequential if the compensation for the claim is not indemnifiable under the Policy. However, as the matter has been fully argued, and perhaps to assist with later proceedings, it is desirable to discuss the arguments.

The phrase, “incurred by”

45    Firstly, Evolution relied upon the use of the word “incurred” in the definition of “Defence Costs” which referred to “all reasonable legal costs and expenses incurred by … the Insured”. It submitted that its use was an indication that Chubb’s obligation was to pay defence costs “as and when” they are incurred. Reference was made to the decision in Wesfarmers Federation Insurance v Wells, where the legal costs clause obliged the insurer to pay the “reasonable legal costs incurred… in defending or settling the claim”. Basten JA (at [92]) considered that, in the circumstances of the policy under consideration, the use of the word “incurred” carried with it the obligation to pay the costs as they were incurred. However, this analysis was in support of the conclusion that the insurer’s obligation arose in respect of a third party claim which, if successful, would be within the scope of the policy rather than only in relation to an actual liability of the insured which was covered by the policy. There, the insured had defeated the third party’s claim and the insurer denied that it was obliged to pay legal costs on the basis that there was no liability to be indemnified under the policy. Basten JA’s observations were made in the context of ascertaining whether the defence costs clause was conditioned upon actual liability or liability for a claim which would, if successful, be covered by the policy. His Honour determined that it was the latter. This was a different issue which did not touch the question as to the time for payment if the obligation had not been triggered, and there is nothing in his Honour’s reasons which suggests that if the condition did not exist, such as because the relevant claim was within an exclusion, the insurer would nevertheless have been obliged to pay defence costs.

46    Evolution relied on the observations of Fryberg J, in dissent, in John Connell Holdings Pty Ltd v Mercantile Mutual Holdings Ltd (1999) 10 ANZ Ins Cas 61-454, to the effect that the concept of incurring a cost or expense covers the incurring of a liability to pay a cost or expense and does not require the actual payment of the liability. It sought to support this by reliance upon the observations of Gleeson CJ in Hawkins v Bank of China (1992) 26 NSWLR 562, 572 that:

Similarly, the word “incurs” takes its meaning from its context and is apt to describe, in an appropriate case, the undertaking of an engagement to pay a sum of money at a future time, even if the engagement is conditional and the amount involved uncertain. Once it is accepted that “debt” may include a contingent debt then there is no obstacle to the conclusion that, in the present context, a debt may be taken to have been incurred when a company entered a contract by which it subjected itself to a conditional but unavoidable obligation to pay a sum of money at a future time. This is such a case.

It further referenced the observations of Kirby P in the same case at 576:

The expression “incurs a debt” in s 556(1) is, in isolation, entirely apt to describe an act on the part of a corporation whereby it renders itself liable to pay a sum of money in the future as a debt.

47    However, these observations do not address the present point as to whether costs should be paid if the obligation to do so is not triggered. The concept of incurring a debt under s 556(1) of the Corporations Act 2001 (Cth), does not greatly assist in the construction of the present matter. To incur a debt is to cause circumstances to happen where a liability arises.

48    Further reliance was placed on the observations of Kirby P in CIC v Insurance Ltd v Bankstown Football Club Ltd (1995) 8 ANZ Ins Cas 61-232 (a decision reversed on appeal), in which it was said in relation to an insurer’s obligation to indemnify in respect of the costs of reinstatement of property damage for costs which have actually been “incurred”, that the insurer’s obligation arose once liability to pay money for reinstatement work was incurred. That would include agreeing to pay money for the repairs. This suffers from the same want of identity to the present issue.

49    It follows that there should be acceptance of Evolution’s submission that the use of the word “incurred” has a temporal indication that, when Chubb’s obligation is triggered, Chubb is required to pay its legal costs and expenses as and when its obligation in relation to them arises.

The obligation to “pay” the defence costs incurred

50    Evolution also submitted that the use of the word “pay” in clause 4.1, when read together with the words of the definition of defence costs, requires Chubb to meet the expenses of defending a claim immediately upon the insured becoming liable to pay them. For this it also relied upon the observations of Basten JA in Wesfarmers Federation Insurance v Wells and particularly at [92] and [96] where his Honour observed that the obligation to “pay” legal costs, rather than to indemnify the insured after they were met, indicated that the clause was to operate immediately rather than any obligation being suspended until the proceedings had been resolved such that it could be known whether the insured was, in fact, liable to the third party. Again, this went to the question of whether the obligation to pay legal costs was conditioned upon a relevant claim being made or upon the existence of actual liability to the third party.

The phrase, “in defending or appealing claim”

51    It can be added that in Wesfarmers Federation Insurance v Wells, Basten JA also emphasised (at [96]) that the clause in question obliged the insurer to pay the costs incurred “in defending or settling” the claim and that the use of the participle in each instance suggested a contemporaneous liability to pay as costs are incurred. Here, the definition of “Defence Costs” also refers to “in defending or appealing” a claim and, similarly, the use of the present as opposed to the past participle tends to suggest that the costs and expenses to be paid are those incurred in defending an indemnifiable claim as they are being undertaken rather than after the event. Nevertheless, it is predicated upon a claim that is indemnifiable under the policy.

References to “claims” or “suits”

52    Reference was also made to clause 5.3, relating to Chubb’s right to elect to defend any suit against Evolution. It was submitted that if Chubb takes over the conduct of the defence, its obligation to pay defence costs will arise in the defence of the suit or claim as they are incurred by it. In reliance on this it is said that the identification in the definition of “Defence Costs” of the temporal requirement for the payment of costs and expenses incurred applied equally regardless of whether it was Chubb or the insured engaged in the defence of the third party’s claim. This was said to provide further support for the conclusion that Chubb’s obligation was to pay the costs of defending a claim prior to the resolution of any uncertainty as to the operation of an exclusion.

Conclusion as to the temporal indicators in the words used in the definition.

53    Ultimately, there was no real dispute as to the temporal operation of clause 4.1 once the obligation to pay defence costs has been enlivened. The use of the word “pay” in clause 4.1 and the terms of the definition of “Defence Costs”, such that Chubb is to “pay” costs and expenses which are “incurred” by the insured “in defending” a “claim”, all indicate that when the obligation arises, Chubb must pay those costs and expenses as the insured incurs liability for them, even before payment. There is nothing which suggests that, if the claim is within the policy’s cover, Chubb is entitled to await the outcome of the proceedings to ascertain whether the insured has any liability to the third party. Chubb did not suggest to the contrary.

54    Despite these conclusions, there is nothing in the temporal operation of clause 4.1 to suggest that Chubb is obliged to pay defence costs when, in fact, it has no obligation to do so. The matters relied upon by Evolution to identify the timing of the performance of the obligation to provide defence costs do not create any additional obligation on it to pay defence costs in respect of claims which will not be covered by the policy. That is so even if the asserted obligation is limited to the time prior to which Chubb’s actual liability is determined.

55    If it were obliged to pay defence costs by reason of the existence of a covered claim, it is contractually required to do so even where, in good faith, it disputes the insured’s entitlement on its mistaken belief that an exclusion applies. On any default, it becomes liable, enforceable by judgment, to pay not only the costs which should have been paid but also damages for any loss caused by its breach. However, the temporal nature of that obligation does not generate some further or additional covenant on Chubb’s part to advance defence costs when it disputes its obligation to do so and that is so even where non-payment will put it in breach of its contract.

Wilkie v Gordian Runoff Ltd

56    At this point it is appropriate to turn to the decision in Wilkie v Gordian Runoff Ltd, which was heavily relied upon by Evolution as supporting its construction of the Policy. As appears from the following discussion, that reliance was misplaced.

57    In that case, the D & O policy was substantially different from the Chubb Policy in a number of important respects. In particular, the defence costs extension was not conditioned upon “indemnifiability” under the policy, but on the making of a claim alleging a “Wrongful Act” as defined. Moreover, the insurer in that case was unable to rely upon the relevant exclusion (Exclusion 7) relating to loss arising out of any claim based upon, inter alia, any deliberate breach of statute, regulation or contract, unless the breach had been established “in fact”. The concept of “in fact” was defined as being marked by either the making of an admission or a determination by adjudication in any court, tribunal or arbitrator that the relevant conduct had occurred. The High Court held that until the facts relied upon by the insurer to invoke the exclusion were established in the manner described, the clause did not have effect to negate the obligation to advance payment of defence costs. In the structure of the policy, any nullifying effect of the exclusion did not directly relate to the payment of defence costs because the exclusions did not, by their terms, apply to that extension. The exclusions could have impacted upon the operation of the defence costs clause in another way. It was conditioned upon the insurer not having declined indemnity and, in the matter before the Court, the insurer had purported to do so in reliance on Exclusion 7. Nevertheless, the Court held that any declinature had to be soundly based and unless and until the circumstances underpinning the exclusion were established “in fact” (as defined), the insurer was disentitled from relying on it to deny indemnity and, in the interim, was obliged to pay the insured’s legal costs.

58    The result in that case was a direct consequence of the nature of the policy terms and specifically, the fact that the insurer’s entitlement to rely upon the exclusion in question was expressly deferred until adjudication or admission by the insured. The High Court’s decision does not provide any general guidance for the interpretation of defence costs clauses in policies which are not similarly worded or structured.

59    However, it is not irrelevant that the extension relied upon in Wilkie v Gordian Runoff Ltd was entitled “Advance Payment of Defence Costs” and the Court held (at 533 [34]) that the obligation required the insurer to “make advance payments of Defence Costs at times when, by hypothesis, the liability to indemnify” may be uncertain. The concept of “advancing” defence costs, being the payment of them before the issue of whether the insured’s claim is covered is well known: Derrington DK and Ashton RS, The Law of Liability Insurance (3rd ed, LexisNexis Butterworths, 2013) p 2399, 11-250.

60    Further, although the insurer in Wilkie v Gordian Runoff Ltd had submitted that the insured’s construction would result in a temporal “gap” between its obligation to pay defence costs and its knowledge of whether it would be liable to pay them, this was answered by the presence of a provision for its express entitlement to recover the amount paid if it was subsequently established that the insured was not entitled to indemnity under the policy by reason of the operation of the exclusion. The majority of the Court said (at 534 [39]):

That “gap” between present uncertainty and ultimate resolution is met in the second paragraph of Extension 9. This reserves to GIO a right of recovery if it be subsequently established that the appellant was “not entitled to indemnity under this policy” because, for example, GIO had made good its denial based on Exclusion 7.

61    The insurer’s express entitlement to recover the amount paid was coherent with both its obligation to pay defence costs “as and when” they were incurred and that Exclusion 7 only became efficacious once the identified matters were established by admission or adjudication.

62    Contrary to Evolution’s submissions, the High Court’s decision, if anything, highlights differences between the policies which are of such significance as to render the same outcome most unlikely. Indeed, it adversely reflects on Evolution’s position. It is appropriate to discuss each of those differences in turn.

No express requirement for curial determination

63    The Chubb Policy contains no provision by which it is required to seek an adjudication of any matter before the exclusion clause relating to professional liability has operative effect. That is significant given Evolution’s assertion that the separate question requires an answer to the effect that Chubb is required to pay defence costs unless and until there is a curial determination that its liability is excluded by the operation of clause 3.13 of the exclusions. Whereas such a result was found to exist in Wilkie v Gordian Runoff Ltd, it was founded upon the express deferral of the relevant exclusion clause until, amongst other things, the existence of curial determination. Here there is no limitation on Chubb relying upon the professional liability exclusion and, if as Chubb alleges, it applies in the present circumstances, Evolution is not entitled to indemnity under the policy.

No obligation to “advance” defence costs

64    Unlike the policy considered in Wilkie v Gordian Runoff Ltd, the Chubb Policy makes no reference to any obligation to “advance” defence costs. The use of that or a similar expression would have facilitated the identification of a requirement imposed on Chubb to make payments prior to any determination of whether the claim was within the scope of the general indemnity: cf Bank of Queensland Ltd v Chartis Australia Insurance Limited [2012] QSC 319 [16] (where the defence costs clause expressly obliged the insurer to advance and pay defence costs as incurred until the operation of any exclusion was confirmed by a curial determination).

65    The context in which the Chubb Policy is to be construed includes the fact that there exists a clear and commonly used method of providing for the advance of defence costs despite the existence of disputes between insurer and insured concerning the policy’s coverage. The fact that the method was not adopted is an indication that the parties did not intend that obligation to exist. At the very least, it is consistent with the above conclusion to that effect.

66    There is nothing uncommercial in the absence of an express provision for the advance of costs despite the insurer’s invocation of an exclusion, which would support a benign construction of the policy’s terms in favour of the insured. There are many, perhaps the majority of, policies which do not carry such a provision, and it is not suggested that their terms imply such a positive benefit. Further, the cost of an additional component in the premium in consideration of such a benefit may well commercially disincline a purchaser to include it as part of the cover purchased.

The absence of any obligation on the insured to reimburse

67    It is also noteworthy that there is an absence of any express obligation on the insured to reimburse Chubb for the costs of defending the action if it transpires that the claim was not within the scope of the policy. Had such a clause existed it might have furthered a construction of the policy which required the insurer to advance the costs until it had been determined that it had no liability under the policy: see for instance Travelers Insurance Company Ltd v Advani [2012] EWHC 623 (QB); Power v Markel Capital Ltd (2007) 14 ANZ Ins Cas 61-742 [11] (“Insurers shall pay Defence Costs on behalf of the Insured(s) on an ongoing basis as they are incurred prior to the final payment or settlement of any Claim provided that… such advance payments by the Insurers shall be repaid to Insurers in the event that the Insured(s) shall not be entitled to payment of any Loss or receipt of any benefit under this Policy”); Wilkie v Gordian Runoff Ltd [29] (“GIO reserves the right to recover any Defence Costs paid under this extension from the Insured… in the event and to the extent that it is subsequently established by judgment or other final adjudication, that they were not entitled to indemnity under this policy”); Rich v CGU Insurance Ltd; Silbermann v CGU Insurance Ltd (2005) 214 ALR 370 [11] (“The Insurer reserves the right to recover any Defence Costs… in the event and to the extent that it is subsequently established by judgement or other final adjudication that the Directors and Officers and/or the Corporation were not entitled to the Defence Costs so advanced”). Its absence, however, is consistent with the absence of any obligation to advance defence costs prior to the resolution of disputes between the insured and insurer.

68    Here, Evolution’s preferred construction would require Chubb to advance defence costs to it in circumstances where, in fact, it may well have had no entitlement to indemnity under the policy by reason of the professional liability exclusion and would be obliged to continue to do so until there was a curial adjudication that the exclusion applied, and, once the adjudication was made, there would be no express contractual obligation for Evolution to repay them. This would be a somewhat uncommercial construction and, if it was intended that Chubb was obliged to advance defence costs one might have expected the adoption of one of the clear expressions available and the correlative entitlement to reimbursement.

69    Just as the issue of when costs that are payable are to be paid is basically different from the issue of whether they are payable or not, so the issue as to whether they are payable and when if liability to pay them is contested is basically different from the issue of when they are payable if there is no dispute. The authorities on one issue are not transportable to the other. The primary premise is different.

Conclusion as to the operation of the defence costs clause

70    It follows from the above discussion that Chubb’s obligation to pay defence costs pursuant to clause 4.1 is conditioned upon the existence of the assertion of a liability by a third party against the insured which, if successful, would be indemnifiable under the policy. That necessarily entails that the manner in which the claim is formulated or its substance is in respect of a liability that falls within the Insuring Agreement in clause 1.1, and that it is not the subject of any of the exclusions.

71    In this case, Chubb asserted that the insured is not entitled to indemnity under the policy because the claim is within an exclusion. If that assertion is correct, with the consequence that it has no obligation to pay defence costs, there is nothing in the policy or its terms, including those used in the definition of “Defence Costs”, to suggest that it is nevertheless obliged to pay them until there is an adjudication that its refusal to pay was justified. That is fortified by the absence of any express obligation to “advance” defence costs or any entitlement to reimbursement.

72    If Chubb’s declinature is incorrect it would render it liable to be ordered to make the payments for which it is liable and to pay damages for breach of contract. However, it did not covenant to accept any additional obligation to make those payments despite its denial of an obligation to do so. Evolution is no doubt entitled to join Chubb to the proceedings brought against it or to otherwise seek relief in separate proceedings and, whilst in the circumstances of this case, that entitlement may be of little value on this issue, it is all that it may do at this stage. It is undoubted, and Chubb did not contend to the contrary, that at any trial of the question of its obligation to pay defence costs, it will bear the onus of establishing the operative effect of any exclusion on which it relies. However, the existence of that onus in those proceedings does not require that until the hearing is finalised Chubb is obliged to make payments in respect of a liability not covered by the policy.

73    There is no doubt that for Evolution the policy does not operate in a manner which best serves its interest in relation to the substantial claims now being made against it. A different policy with terms which require the advancing of defence costs by an insurer despite its denials of any obligation to do so would serve it better, but to construe the Chubb Policy in that way would amount to a substantial rewriting of the agreement. In this respect it is apt to refer to the observations of Lord Mustill in Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 388:

There comes a point at which the court should remind itself that the task is to discover what the parties meant from what they have said, and that to force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could better have been made. This is an illegitimate role for a court.

74    This passage was recently cited with approval by Meagher JA and Ball J in HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 [46].

Answer to the question posed

75    The question posed to the Court tends to assume that Chubb is presently obliged to pay defence costs or that the matter now before the Court includes the question of whether it is so obliged. The parties made submissions about this issue and it is apparent that they did not intend that any such issue be determined. The quintessential question was whether the policy operated such that Chubb was obliged to pay defence costs in advance of a judicial determination that clause 3.13 applied and that question should be answered in the negative.

A note of appreciation to the legal representatives

76    It would be remiss not to commend the legal practitioners involved in this matter for the exemplary manner in which it was conducted. This is hard fought litigation in which the stakes for the parties are particularly high. Mr Jones SC, his junior and instructing solicitors on the one hand, and Mr Williams SC, his junior and instructing solicitors on the other, made every appropriate argument and took every necessary step in the advancement of their respective client’s interests. Whilst fully performing their duties to their clients, they nevertheless acted appropriately and co-operatively to identify the real issues in dispute and, through that, brought the matter on for determination in a most efficacious manner. That is the approach to modern litigation expected by the Courts as observed by Allsop J in White v Overland [2001] FCA 1333 [4], and the professionalism displayed by the lawyers in this matter ought to serve as an example to the profession in general.

Associate:    

Dated:    24 November 2020