Mind the gap: director indemnified for costs of own action

Dean Carrigan, Australia Corporate News, Issue 16, 6 September 2006, p.1

A recent New South Wales Supreme Court decision has highlighted potential gaps in Directors' and Officers' Liability insurance policies. This article takes a look at the case and discusses the potential ramifications for companies, their insurers and their shareholders.

In August this year, the New South Wales Supreme Court required a company (NRMA) to indemnify its director (Mr Whitlam) for costs incurred in pursuing a defamation action initiated by the director against a third party under the terms of a deed of indemnity. NRMA had denied it was liable to the director because the indemnities sought were not liabilities that arose from Mr Whitlam defending a claim made against him in his capacity as an officer of the company. Although Mr Whitlam had been acting in his capacity as a director at the time the alleged defamation occurred, it had been Mr Whitlam and not the third party who had commenced proceedings.

The court was of the view that there was nothing in section 199A of the Corporations Act or the relevant indemnity deed that would prohibit an indemnity for costs incurred in pursuing a defamation action. The court found that by incurring costs and bringing the defamation proceedings, Mr Whitlam had taken steps in defending allegations made against him as an officer of the company. The deed was very broad and promised indemnity for all liabilities incurred by Mr Whitlam as an officer of NRMA subject to sections 199A(2) and 199A(3) of the Corporations Act.

The author points out that the finding is of particular significance because generally Directors and Officers Liability insurance policies do not require the insurer to pay the costs of legal actions initiated by directors, leaving a gap which a company must then fund out of its own pocket.

The author makes it clear that this decision is ultimately based on the wording of the deed of indemnity. The indemnities were broader than the company intended because the court found that they included not only actions brought against Mr Whitlam but also actions commenced by Mr Whitlam when defending defamatory allegations made against him in his capacity as an officer. The author notes that the key lessons to be drawn from this case are:

• companies should ensure that the indemnities that they provide to their officers are aligned with their own directors' and officers' insurance where possible; or
  
  
• at a minimum, at least be aware of any gaps between their insurance cover and the indemnities given to their officers.

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