Whitlam v National Roads & Motorists Association  NSWSC 766
On 3 August 2006 Bergin J of the NSW Supreme Court held that an indemnity provided to a director in a Deed of Indemnity, Insurance and Access extended to payment of the director’s costs of bringing defamation proceedings to protect his reputation. The reasoning was that defamation proceedings are the process by which a defamatory allegation is defended. This D&O Insurers’ Alert explores the implications of this decision for corporate Insureds and D&O Insurers.
The plaintiff, Nicholas Whitlam, was a director and president of the National Roads & Motorists’ Association Limited (NRMA). The NRMA agreed to indemnify Whitlam pursuant to two relevant Deeds of Indemnity, Insurance and Access on a full indemnity basis and to the full extent permitted by law against all liabilities (meaning any loss, liabilities, costs, charges or expenses) incurred by Whitlam as an officer of NRMA. The indemnity extended to taxed costs incurred in defending proceedings, whether civil or criminal, in which judgment is given if favour of the officer or in which the officer is acquitted. The deeds provided that the indemnity was enforceable without Whitlam having to first incur any expense or make any payment.
In 2004 Whitlam commenced proceedings in the NSW Supreme Court seeking declarations that the NRMA was obliged to indemnify him for expenses incurred and to be incurred in bringing defamation proceedings against the Channel 9 television network and for expenses incurred in relation to successful defamation proceedings which he had brought against the radio station 2GB in 2002.
The defamatory imputations arose out of an interview which Whitlam had given to the Channel 9 television network on 6 March 2001 and which was repeated in part on the 2GB radio station.
In delivering the judgment on 3 August 2006 Bergin J observed that indemnities protecting directors against liabilities incurred whilst performing their duties are an important part of a public company’s armoury to attract highly qualified and appropriately experienced officers to the board. Her Honour pointed out that the modern corporate environment includes the media pursuing directors who chair public companies for commentary on matters relevant to the companies’ performances. Bergin J expressed the view that in such an environment neither the general law nor Section 199A of the Corporations Law prohibited a company from indemnifying a director to defend himself/herself against defamatory imputations published about a director arising from the performance of his/her duties.
In interpreting the terms of the relevant deed Bergin J relied on McCann v Switzerland Insurance Australia Limited  203 CLR 579 to point out that the deed was a commercial agreement and should be given a business-like construction. This meant that the indemnity should be construed in the context of the deed as a whole taking into account the commercial circumstances and the purpose of the deed.
Definition of Claim
The deed imposed on Whitlam an obligation to advise the NRMA "immediately" he became aware of any "Claim" against him which "…involves or may involve a liability…" for which he sought indemnity. "Claim" was defined to mean "…any allegation, cause of action, proceeding, claim, suit or demand of any nature whatsoever…". Bergin J pointed out that whilst the definition of "Claim" was to a large part consistent with the traditional approach to directors’ indemnities, that is, where the director is sued by a third party, the definition went further because it included the words "allegation…of any nature whatsoever…". Bergin J held that expression encompassed the concept of an assertion, complaint or charge against Whitlam, that is, that he had done something wrong or was guilty of some wrong doing.
Bergin J held it was clear from the terms of the deed that the parties intended that if proceedings were brought against Whitlam, as an officer of the NRMA, and he incurred a liability (for instance, costs in defending those proceedings), he would be entitled to a full indemnity under the deed for those costs. Equally if an allegation that amounted to a claim was made against Whitlam as an officer of NRMA and he incurred a liability, that is, costs in defending that allegation, he would be entitled to a full indemnity for those costs and expenses. The question which then arose for consideration was whether the initiation of proceedings alleging defamation was a step in defending a claim.
Bergin J held that the deed indemnified Whitlam for liabilities incurred in defending an "allegation", including a defamatory imputation, and that the bringing of defamation proceedings is the process by which such an allegation is defended, albeit that the director is the moving party in the proceedings. Her Honour noted that the indemnity for those costs is limited to cases in which Whitlam is vindicated by way of an apology, settlement or a favourable verdict or judgment. This was because the indemnity provided that it only applied if the director was successful in defending the proceedings.
What this Means
Bergin J’s decision represents an extension of the traditional approach to the meaning of "Claim" with respect to directors’ indemnities which has historically been interpreted to be limited to circumstances where the director is sued or threatened to be sued by a third party. The decision turns in large part on the wide definition of "Claim" in the relevant deed, although it is significant to note that that definition is commonly used in directors’ deeds of indemnity, insurance and access in Australia. It follows that companies which provide their directors with broad indemnities, such as the one which the NRMA provided, are likely to find themselves liable for the costs of a director bringing defamation proceedings to protect his/her reputation.
Although the decision represents a slight shift in the nature of the exposure facing a company we do not expect that it is likely to translate into an increase in claims under D&O policies. The decision is unlikely to affect the cover available under Insuring Clauses 1 and 2 of traditional D&O policies because the director/officer (under Insuring clause 1) and the company (under Insuring clause 2) will likely not be able to claim indemnity under the policy unless the triggers in the Insuring clauses are met. The scope of the company indemnity cannot expand the nature of cover available under the policy. Therefore, the definition of "claim" in the policy (rather than the deed) will be more relevant. The definitions in a D&O policy are much narrower and are unlikely to encompass the costs of bringing proceedings to defend a director’s reputation. We do however recommend that you review your D&O wordings to determine whether the approach applied by Bergin J could be relied upon by a director or company to make a claim for payment of their legal costs when they consider that they have been defamed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.