Wesfarmers Federation Insurance Limited v Stephen Wells t/as Wells Plumbing  NSWCA 186
How can an insured recover its defence costs when the claim isn't covered?
D&O insurers can advance defence costs on the basis they can recover them if the court makes adverse findings, e.g. dishonesty on the insured's part. However outside this context we tend to assume that if the liability is not covered then nor are the defence costs. This case shows that it is not so straightforward.
Stephen Wells t/as Wells Plumbing was sued in the District Court of NSW by Adam Hubbard over injuries suffered by Mr Hubbard on 18 December 2001 in the course of plumbing works undertaken by Mr Wells. Mr Hubbard alleged that he was an independent contractor to Mr Wells and that Mr Wells had breached a duty of care owed to him.
Mr Wells had a business liability policy with Wesfarmers Federation Insurance which provided indemnity for 'legal liability to pay compensation for personal injury' and also provided cover for legal costs on terms that 'if you are entitled to be indemnified under this policy for a claim made against you, we pay the reasonable legal costs incurred with our prior written consent in defending or setting aside the claim'.
Wesfarmers initially appointed solicitors who acted for Mr Wells on a reservation of rights basis. Prior to trial they advised that their investigations indicated that Mr Hubbard was in fact Mr Wells' employee and therefore declined indemnity on behalf of Wesfarmers relying on the standard exclusion. They advised Mr Wells to obtain his own legal representation.
Mr Wells did so. He then cross-claimed against Wesfarmers seeking indemnity under the policy. He did not take any steps to involve his workers compensation insurer because he did not have one.
By the time of the trial it was common ground that if the plaintiff was in fact an employee, as Wesfarmers argued, then his claim would fail as his injuries were not sufficiently serious to overcome the 15% whole person impairment threshold. The District Court duly found that the plaintiff was an independent contractor, awarded damages against Mr Wells and ordered Wesfarmers to indemnify him.
Wesfarmers appealed. Mr Wells also appealed against the finding of liability on his part. The NSW Court of Appeal upheld the argument that the plaintiff was an employee and substituted a verdict for Mr Wells. Although Mr Wells was also awarded costs, he sought an order that Wesfarmers pay his defence costs presumably against the likelihood that the plaintiff could not. In circumstances in which Wesfarmers' entitlement to deny indemnity had been resoundingly endorsed, one would expect that it could not be liable for Mr Wells' defence costs. The Court of Appeal held otherwise.
The Judgment – defence costs clause covers 'claims'
The primary insuring clause indemnified Mr Wells against liability to pay compensation. In the absence of any liability, there was nothing to indemnify. Even if the plaintiff's injuries had exceeded the 15% WPI threshold the primary claim for indemnity would have failed on account of the exclusion of liabilities for injuries to employees. As for the legal costs however, the Court of Appeal held that the clause did not apply to 'liabilities' but to 'claims'. If a claim was framed in such a way that it engaged the primary insuring clause (and did not trigger an exclusion) then Wesfarmers was required to 'pay the reasonable legal costs incurred with (its) prior written consent in defending or settling the claim'.
Wesfarmers' former solicitors' suggestion that Mr Wells obtain legal representation to protect his interests in the proceedings amounted to consent to the incurring of such costs. In making this finding, the court inferred that Wesfarmers must have known that its denial of indemnity might or might not be successful and that the defence costs incurred by Mr Wells might subsequently be the subject of a claim for indemnity under the legal costs clause.
The court cited four previous decisions in support of its conclusion. In all of these decisions, as in the Wesfarmers case itself, the insurer had argued that the costs cover was dependent upon the primary liability cover and therefore required a liability on the insured's part in order to entitle the insured to recover its defence costs. Absent liability there was no obligation to indemnify. Each of the costs clauses employed the word 'claim' and the courts drew the same distinction between the 'liability' indemnified by the primary insuring clause and the costs of defending the 'claim' indemnified by the costs clause. Provided the claim was framed in terms within the scope of the insuring clause the costs clause was engaged. This was the result in all but one of the cases cited.
The exception however was the only case really on point. In Sherlex Pty Limited v Thornton (2003) the Queensland Court of Appeal considered a claim by the insured for defence costs where, just as in the present case, the insurer could rely on an exclusion. The insured's defence costs were held not recoverable. The claim's engagement of the primary insuring clause alone was not sufficient as the insuring clause had to be read subject to the exclusions. If the insured's actual or potential liability fell foul of an exclusion then the costs of defending or settling the claim were not covered.
The same result should, it is submitted, have followed in this case. It is a result which is consistent with New Zealand and Canadian authority to which the court was not referred. It is also a result which is consistent with what must have been the real intentions of the parties.
True, the parties' intentions are ultimately to be inferred from the words of the policy but one would have thought that much clearer words would be necessary to support an inference that the parties intended the insured to recover defence costs for excluded claims.
The court's decision that the defence costs were incurred with Wesfarmers' consent might also raise eyebrows. However it would seem that even if the court had held otherwise, the insured's incurring of costs without consent could have been 'exonerated' by s.54(1) Insurance Contracts Act 1984 as in Antico v Heath Fielding (1997).
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