Applicants and allocation clauses – an indemnity dispute regarding defence costs

06 July 2021

The Court ordered AIG Australia Limited to fully indemnify two policyholders for defence costs incurred in underlying Supreme Court proceedings pursuant to a management liability policy, despite its reliance on a narrow definition of “manager”. The Court applied a businesslike interpretation to the definition of manager and found that the policyholders were entitled to a complete indemnity for their defence costs.

In Issue

  • Whether the Applicants were entitled to indemnity for their costs in defending Supreme Court proceedings commenced against them pursuant to a management liability policy.

The background

Mr Casey and Mr Clarke (the Applicants) were directors of ‘Community Work’ (currently in liquidation), a not-for-profit organisation that provided care services to indigenous youths. The Applicants were also directors of Alpha Support Services, the trustee of the Alpha Trust (Alpha), during periods that overlapped with their directorship at Community Work. Whilst directors of Community Work, the Applicants caused Community Work to subcontract the bulk of the care services it provided to Alpha, and made multiple significant payments to Alpha.

Supreme Court proceedings were brought against the Applicants by Community Work and its liquidators, alleging that the Applicants breached their duty of care to Community Work by allowing significant payments to be made to Alpha and additionally breached their fiduciary duty to not place themselves in a position of conflict (the Proceedings). The Proceedings are ongoing.

The Applicants sought indemnity under a management liability policy (the Policy) issued by AIG Australia Limited (AIG) to Community Work in relation to the reasonable defence costs incurred in defending the Proceedings. Whilst AIG accepted that cover was available for the breach of duty claim, it declined cover in relation to the breach of fiduciary aspect of the claim. As such, AIG relied on an allocation clause contained in the Policy to limit its liability under the Policy to 70% of the defence costs incurred by the Applicants, being an amount that was said to have reflected the proportion of the claim arising from the breach of duty allegations.

The decision at trial

The Policy defined “Manager” as “any natural person who was, is or during the Policy Period becomes: (i) a director, officer or committee member of any Company…but only when and to the extent that such Manager is acting for and on behalf of the Company in any of the capacities referred to in (i)…above.” AIG submitted that the words “but only when and to the extent” prevented the Applicants from obtaining indemnity under the Policy for the breach of fiduciary claim, as, in respect of that allegation, they were acting in their capacity not only as directors of Community Work, but also of Alpha.

The Court rejected that interpretation on the basis that it gave an overly refined definition of the term ‘Manager’ for the purposes of the Policy. The Court also noted that the breach of fiduciary allegations, in any event, depended on the Applicants acting in their capacity as directors of Community Work.

Finally, the Court found that it would be nonsensical to construe the Policy so as to decline indemnity for a claim against an insured for alleged innocent breach of fiduciary duty, in circumstances where alleged fraudulent breaches may still require AIG to advance defence costs until those serious allegations are found.

The Court ordered AIG to pay all defence costs incurred by the Applicants in the Proceedings, including reimbursement of the 30% portion of defence costs previously withheld by AIG in reliance upon the allocation clause.

Implications for you

The case provides a useful reminder in considering the commercial context of a policy and its provisions as a whole. The decision otherwise provides some useful commentary on contract interpretation and application.

Casey v AIG Australia Limited [2021] FCA 553

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