Australia: Insurance Alert #57

Last Updated: 26 September 2007
Article by Robert Samut

Power v Markel Ltd [2007] QCA 284 (31 August 2007)

The facts

David Power is a councillor and deputy mayor for the Gold Coast City Council. From July to December 2005, the Crime and Misconduct Commission ("CMC") conducted an inquiry into suspected official misconduct of councillors including Mr Power. The inquiries related to the election of councillors in March 2004. Mr Power was required by the CMC to provide a written statement to the inquiry, produce documents and give oral evidence.

In April 2006, Mr Power was charged with breaches of Section 218(1) of the Crime and Misconduct Act 2001 (Qld) for allegedly giving the CMC a document containing information which he knew to be false or misleading in a material respect. Mr Power engaged solicitors and counsel to defend the prosecution. The Magistrate ultimately found that Mr Power had no case to answer on one charge, and acquitted him on the other.

Markel Ltd ("Markel"), is a representative of Markel Syndicate 3000 at Lloyds. Markel had underwritten a policy insuring the Gold Coast City Council, its councillors, employees and certain others. The insurance policy included director’s and officer’s liability cover. In addition to the primary cover there were certain extensions to the insuring clause which included the following:-

"Investigations, Inquiries, Prosecutions (Criminal or Otherwise)

Insurers shall pay on behalf of the Insured(s) on an ongoing basis all reasonable legal fees, costs and expenses incurred in being legally represented with respect to any legally compellable attendance at any Investigation provided that:-

(1) the Investigation relates to matters which may give rise to a Claim.

(2) . . ."

Relevant definitions included:

"Claim" means any notice received by . . the Insured(s) alleged to have committed a Wrongful Act, of the intention of a person or entity to hold the Insured(s) responsible for the results of any Wrongful Act, including any demand received by the Insured(s) for money or services naming the Insured(s) as defendant(s), or the institution of legal, arbitration or administrative proceedings against the Insured(s).

"Wrongful Act" means any act, error, misstatement, misleading statement, misleading conduct, omission, neglect or breach of duty made, committed, attempted or allegedly made, committed or attempted by an insured individually or otherwise, in the course of the duties of that Insured(s) . ."

The litigation

Mr Power brought an action against Markel seeking a declaration that he was entitled to be indemnified for legal expenses incurred in defending the criminal proceedings.

To fall within the relevant extension of cover the legal fees, costs and expenses must have been incurred with respect to a "legally compellable attendance" at an "Investigation", and that investigation must have related to matters which may give rise to a "Claim". His Honour accepted that the criminal proceeding was an "Investigation" under the policy, but that the requirement that "the Investigation relates to matters which may give rise to a Claim" had not been met.

Counsel for the applicant was, according to McMurdo J, unable to explain what might constitute a "Claim" which could arise from the criminal proceedings. His Honour said:-

"It is possible to conceive of circumstances where a criminal prosecution would investigate matters which have a potential for a Claim; for example a prosecution for dangerous driving causing bodily harm. In the present case, the matters to which the criminal proceedings related did not have the potential to give rise to a Claim . . . "

His Honour held that the extension to the insuring clause did not apply and the applicant was not entitled to reimbursement of his legal costs.

His Honour also said that to have a "Claim" you must have a loss ie. a process by which a person seeks from the Insured some money of a kind which is a loss. For this reason he held that the process by which a criminal prosecution is commenced against the insured (such as Mr Power) could not constitute a claim.

Markel's objections also included an argument that Mr Power’s conduct did not occur in the course of his duty as a councillor. MrMurdo J rejected that submission. He said that Mr Power’s provision of the statement to the CMC for its investigation of the propriety of his performance of a councillor was a consequence of what he was alleged to have done in the course of his work with the Council, and the process in which he was participating was one for the ultimate benefit of the Council as well as the wider public interest.

The decision

Mr Power appealed. Markel also filed a notice of contention in which it challenged the trial judge’s finding on the question of whether the relevant conduct occurred in the course of Mr Power’s duties as a councillor.

By majority of 2:1, the Court of Appeal upheld Mr Power’s appeal. His Honour Mr Justice Fryberg gave the leading judgment.

Markel argued that Mr Power was alleged to have given untruthful information to the CMC and that this did not occur in the course of his engagement or continuing activity as a councillor. Markel argued that the statement was given to the CMC in Mr Power’s capacity as a citizen obliged to obey the law. The court rejected this argument. Fryberg J said:-

"I would reject this decision. Once he was elected, Mr Power’s public actions necessarily reflected on the council. By taking office he impliedly came under a duty not to bring the council improperly into public disrepute. That is precisely what he would have done had he refused to make a statement to the CMC . . . Mr Power had a legal duty under the Crime & Misconduct Act 2001, to provide a statement, and should he have failed to do so, he would have been in breach of the code by not showing respect for the law. Such conduct would hardly have maintained or strengthened the public’s trust and confidence in the integrity of the council."

The majority in the Court of Appeal disagreed with McMurdo J about whether the investigation related to matters which might give rise to a "Claim". They disagreed that the "Claim" had to be one capable of giving rise to a financial loss. Fryberg commented that to take such an approach would mean that the insured could only succeed if he was able to show an entitlement to primary cover. He thought that the policy should not be so construed. He said:-

"The whole point of the extension is to provide for payment of legal expenses as they arise, at a time when it may not be clear whether some ground exists to deny the primary cover. The cover provided by the extension is distinct from the primary cover."

Consistent with this approach, the majority also disagreed with McMurdo’s finding that no claim could arise from the conduct the subject of the criminal proceedings. He observed that the policy required the Investigation (criminal proceedings) to relate to matters, and that those matters be ones which may give rise to a Claim. In this case, the matters were the elements of the offence under the Crime and Misconduct Act 2001 ie. making a misleading statement. Those matters were always capable of giving rise to a Claim (legal proceedings) and had in fact done so. His Honour held that the institution of the prosecution was a "Claim" as defined in the policy.

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.

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