Professional Liability Guide

CHAPTER 10 – DEFENCE COSTS

Whilst fraud was not the basis for declining the indemnity, the Bank similarly contended that the obligation to advance defence costs could not be curtailed by the insurer’s decision, particularly in circumstances in which the exclusion clause was not expressly framed as excusing the insurer from an obligation to extend defence costs. Justice Jackson observed that the ‘ high point ’ of cases in which it was held that it would be ‘ incongruous for an insurer to be liable to indemnify the defence costs of a claim to which liability for the loss claim was excluded’ was McCarthy v St Paul International Insurance Co Ltd . 553 That case concerned an obligation to indemnify liability that was excluded in respect of liability arising from ‘ eight enumerated factors set out in the policy, including a dishonesty or fraudulent act or omission of the insured .’ That is, the question was whether the insurer declining the extension of defence costs could be justified in circumstances where the dishonesty exclusion was but one of the causes of the liability. In upholding the insurer’s decline of indemnity for both the loss and the extension of defence costs, the Full Federal Court held in McCarthy that a construction of the policy that ‘restricted the operation of the exclusions to liability to the claimant for loss, so that there was no exclusion of liability for defence costs’ would lead to ‘inconvenient and obviously unintended results’ and that ‘unlikely commercial results enforced the otherwise available construction, … which gives a commercial coherence and businesslike meaning to the relationship between the insuring clause and the exclusion clause.’ 554 Justice Jackson also referred to the Victorian Court of Appeal’s endorsement of the question put by the insurer in Major Engineering Pty Ltd v CGU Insurance Limited 555 that ‘Why should we have to pay for costs when there is no cover under the Policy?’ and observed that ultimately the determination of the effect of the policy is a finely balanced matter that turns on a ‘ businesslike and commonsensical ’ construction of the whole policy. In dealing with the argument over whether the preamble to the exclusion section of the policy contained a reference to an exclusion in respect of the obligation to advance defence costs, Jackson J preferred the following construction of the policy. If the insurer denied indemnity for the claim, the insurer was not obliged to pay defence costs because: ‘a) The language of the insuring clause is that the insurer will pay “Loss and Defence Costs” resulting from any qualifying Claim; b) It seems to be an unlikely commercial result that the insurer would be ultimately liable (not just by way of advances to Defence Costs) to pay Defence Costs in respect of the claim which is not otherwise covered because of an exclusion under cl 3; c) Neither the subject matter of the policy nor the text supports the construction that it is intended that the policy deal with liability for Loss and Defence Costs differently, except for the opening words of cl 3 (which omits reference to “Defence Costs”); and d) The second sentence of cl 6.6 is clearly inconsistent with that construction in respect of cl 3.8.’ 556

553 (2007) 157 FCR 402. 554 Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2012] QSC 319 [70]. 555 (2011) 282 ALR 363. 556 Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2012] QSC 319 [74].

109

© Carter Newell 2023