A review of a number of director and executive indemnities indicates that the officers of those companies would suffer the same fate as Nick Whitlam should they choose to bring an action against a third party to recover damages for an injury suffered as a result of actions taken while an officer of the company. A review of the standard terms of two leading director and officer (D&O) insurance policies also indicates that the policy is unlikely to fill this gap.
Importantly, the Corporations Act does not prohibit the company providing an indemnity or paying an insurance premium in such circumstances.
On 31 August this year, the High Court rejected an application by Nick Whitlam, former President of NRMA, to appeal a decision of the New South Wales Court of Appeal. The Court of Appeal had held that Whitlam’s indemnity did not extend to his legal costs in bringing defamation proceedings against 2GB and Channel Nine relating to an interview Whitlam had participated in with Channel Nine. This was so even though Whitlam had only agreed to participate in the interview in the course of his duties as President of NRMA, after consultation with various senior officers of NRMA and the media adviser to NRMA and receiving their tacit approval to do so.
The terms of the indemnity provided by NRMA to Whitlam reflects the language found in many current deeds of indemnity which, typically, only contemplate coverage for legal costs where the action is brought against the officer, not where the officer brings the action. This limitation is also the case in many standard D&O policies. Accordingly, not only is the officer unable to seek indemnification from the company, the D&O policy will not bridge the gap and provide cover in those circumstances.
Critical to the Court’s decision was the meaning of the phrase ‘as an officer of the company’. This phrase is key to many deeds of indemnity and D&O policies. The Court held that ‘[w]hen Mr Whitlam incurred the costs of the defamation actions, he was seeking to redress consequences of actions he had taken as an officer, but in incurring those costs, he was not, then and there, acting as an officer. In these circumstances, when Mr Whitlam incurred legal costs in connection with the defamation action, his commencement of those defamation actions was not part of his duties as an officer of NRMA. In those circumstances, the incurring of the costs was not in his role as an officer of NRMA.’ Accordingly, the indemnity from NRMA did not extend to the legal costs.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).