In brief - Policy wording and definitions should be clear
The insurance industry has struggled with the correct application of inquiry cost extensions to a variety of different circumstances. To be sure about the ambit of cover, insurers should pay attention to the drafting of these extensions while insureds should seek broad extensions and review the wording carefully.
Government and regulatory body investigations on the increase
As the use of investigative powers by governments and regulatory bodies to investigate controversial commercial, social and political matters continues to grow, it is useful to consider the scope and merit of defence costs cover, commonly described as inquiry or official investigation cost extensions.
There is no common inquiry cover extension for liability insurance policies and the extent to which they provide cover for defence costs for certain investigations remains unclear. There is limited judicial review of these extensions. This uncertainty poses a commercial risk for insurers offering this cover and a potential shortfall in expected cover for policy holders.
What is inquiry cost cover?
Inquiry cost cover is commonly provided by way of an extension to professional indemnity, and directors' and officers' (D&O) liability insurance policies. They are increasingly being offered as part of other hybrid or broad form policies. Inquiry extensions cover the reasonable defence costs incurred for representation at certain inquiries and investigations.
Traditionally, these policies provide cover for claims made by third parties, i.e. claims for a civil liability arising out of a loss suffered or incurred. They do not cover defence costs for inquiries which may be a prelude to a civil claim, or simply be potentially detrimental to the reputation of a professional or the goodwill of a business.
However, professionals and company officers may be subject to an inquiry or investigation initiated by a regulatory or disciplinary body. Inquiries by specialist bodies like a royal commission and anti-corruption bodies are becoming more prevalent, and company officers are being more frequently investigated by government bodies such as the Australian Securities and Investments Commission. Insurers have responded to this market demand by offering inquiry cover as a policy extension.
Extensions blur distinction between civil and criminal cover
If insureds are required to attend an inquiry, investigation or disciplinary hearing (as defined by the policy) instituted by an official body and relating to their profession or business, under an inquiry extension they are entitled to their reasonable defence costs for advice and representation.
Extensions provide that the defence costs can only be incurred with the insurer's consent. The limit of defence costs is usually specified as a sub-limit to the policy and generally the amount is a fraction of the cover available for defence costs under a primary liability insuring clause of the policy.
Insurers often made the strategic decision to fund the defence costs of an inquiry, despite the fact that the policy might not operate to provide cover as there was no claim. These funding arrangements were essentially ex-gratia costs cover for defence costs to put the insured in the best position possible to prevent or limit a future civil claim. Representation at a coronial inquest for a workplace fatality or medical misadventure are good examples of this.
Yet now insurers are prepared to assist policy holders in defending their reputations and exposure to possible criminal convictions. The result is that these extensions have blurred the distinction with the cover traditionally offered by liability policies. Inquiry extensions contemplate a level of cover in circumstances where the insured may be investigated for potential criminal conduct or intentional breaches of the common law or statute.
Insurance market offers considerable variation in cover and terms
Commonly, there is a basic clause providing inquiries cover with reference to certain defined events or circumstances which usually explain the ambit of the cover. The defined terms will include cover for "investigation costs" or "inquiry costs".
The definitions section of a policy specifies what types of investigations are contemplated. Cover will extend to matters involving circumstances broadly described under one or more of the following:
- official investigation
- examinations
- tribunal
- enquiry
- other official enquiry
- quasi-legal enquiry
- coronial inquiry/investigation
No standard definition of investigating body
A feature of these extensions is that the investigation or inquiry must be carried out by a body or organisation authorised by law (and commonly statute) and has the power over an insured to investigate them. A phrase such as a body "which has jurisdiction over the insured by reason of statutory power or by a reason of insured's membership of a professional association which has the power to discipline them" will define the ambit of cover. Other phrases might include an investigation undertaken by "any official body or institution empowered by law to investigate the professional conduct of an insured".
Some policies define "investigating body" very widely to include the coroner's court, royal commissions, statutory regulatory bodies, tribunals and legally constituted industry or professional boards. Others are not so descriptive. One policy we have observed expressly excludes a parliamentary inquiry or any committee of parliament.
Without a clear definition, what is an official inquiry or investigation by a body empowered to do? Do traditional police investigations fall into this class? What about inquiries by other regulatory authorities that have the power to lay criminal charges? Is an insured entitled to defence costs for representation and prosecution in a criminal matter?
Inquiry usually must compel insured's attendance and be linked to insured's profession or business
A regular theme in such extensions (although not always) is the requirement that the inquiry must be one that can "coerce or compel" an insured's attendance. This suggests that insurers did not wish to pay for defence costs of representation where it was optional for an insured to appear and that cover was intended for only the most serious matters that may impact on an insured's reputation or business.
What does it mean when in order for the extension to be enlivened the insured must be "required" to "attend" or be "compelled" or "requiring" a response from an insured? Given accuseds' right to remain silent and to not incriminate themselves, does the extension operate to provide cover when at law an insured may not be required to provide any response or attend (and give evidence) at the inquiry?
Another common feature is that the conduct that is being investigated must be linked to the insured's profession or business. For example, solicitors may be entitled to defence costs for an inquiry held into their professional conduct by their professional association or for the professional services provided to a client, but not for conduct while acting as a volunteer in matters unrelated to the performance of their professional duties.
When is cover triggered?
Some extensions link the provision of cover to the need to establish the potential of a claim that may be made which may trigger cover under a primary liability insuring clause of a policy. We have observed wordings that may provide cover where the inquiry "may lead to a recommendation or finding which might give rise to a claim (as defined by the policy)".
Others specify that the extension operates only for matters that are not otherwise excluded by the policy. Such a provision makes it difficult for those advising on the ambit of the extension because those matters that are commonly excluded under a liability policy generally relate to civil claims, not the circumstances of an inquiry.
Usually inquiry extensions cover is available when the inquiry or investigation is "ordered, commissioned or received" in the policy period. Is a letter from an investigating body seeking information about a complaint or investigation a trigger for cover in the policy period in which that communication is received, or is it only when an insured receives notice of a compellable hearing? The period between the commencement of an investigation and the hearing can straddle a number of policy years.
Policy terms may have little relevance to intended cover of an inquiry extension
Our research indicates that there is limited judicial review of inquiry extensions, and what there is may be of limited guidance because of the great variety in extension wordings in the market.
Unfortunately, these extensions often complicate their construction by making reference back to defined terms in the policy; primarily for cover for civil claims, as defined, which relates back to defined conduct such as wrongful act, act or omission, or loss and damage. Such terms have little relevance to the cover an inquiry extension is intended to provide.
Here are a number of cases to illustrate how the courts interpret this type of cover:
Insurer fails in bid to deny inquiry cost cover
In Power v ACE Insurance [2005] QSC 327, Power was a councillor who received notice to appear before the Queensland Crime and Misconduct Commission (CMC) for suspected council misconduct. He was required to give a written statement, provide documents and give oral evidence to the CMC. Power obtained legal representation for this inquiry, but his insurer disputed that its policy's inquiries cover covered his defence costs because the investigation did not relate to his conduct as a councillor. ACE was unsuccessful on that point.
Criminal prosecution falls within inquiry extension
Power was subsequently charged with breaches of the Crime and Misconduct Act 2001 (QLD) for giving the CMC a document containing information that he knew to be false and misleading. In Power v Markel Capital Limited [2007] QCA 284, Power's lawyers sought confirmation from Markel that he had cover under the inquiry extension for his legal costs for this criminal investigation and prosecution. It was not challenged that this prosecution fell within the inquiry extension.
The case concerned how the inquiry clause responded to the facts and whether this prosecution would give rise to a claim within the meaning of the policy which was necessary to enliven cover. It seems to have been accepted, without determination, that Power's legal representation was with "respect to a legally compellable attendance in criminal proceedings" as defined by the extension, so a question of what was compellable for the purpose of the extension was not considered. The court made some interesting observations about how such an extension should be construed.
Is insurer obliged to reimburse costs when insured was obliged to indemnify insurer?
In Integraph Best (Vic) Pty Ltd & Ors v QBE Insurance Ltd [2005] VSCA 180, QBE appealed against the Supreme Court of Victoria's decision at first instance that it was obliged to indemnify Intergraph, the operator of an ambulance call centre in Victoria, for the legal representation of its directors at the Ambulance Royal Commission under an inquiry extension. The case turned on the question of whether the insurer was obliged to reimburse the directors and officers in circumstances where Intergraph had an obligation to indemnify them for these legal costs. While not directly relevant to the issue discussed in this article, the Court of Appeal construed this extension as one intended to provide cover separate and distinct from claims cover, and must be read in that light.
Fraudulent conduct not excluded by inquiry cost cover
Most recently, in Poole v Chubb Insurance Company of Australia Ltd [2014] NSWSC 1832, the NSW Supreme Court considered a claim for defence costs under an inquiry extension of a D&O policy. A director sought representation at the NSW Independent Commission Against Corruption inquiry. Chubb denied cover for non-disclosure and misrepresentation. There was no dispute that this investigation fell within the inquiry extension described in the policy as a "formal investigation". Accordingly, the decision did not consider the application or construction of the extension, but it is noted that the conduct alleged against Mr Poole which was said to vitiate cover was fraudulent; alleged conduct that apparently was not excluded by the extension.
Basic principles for interpreting inquiry extensions
Some basic principles that can be extracted from the authorities and our analysis of common inquiry extensions as a guide to the application of inquiry extensions include:
- An inquiry extension commonly stands alone from other indemnity provisions of a policy and is essentially a cost advancement provision.
- The inquiry extension must be read in the context of the whole of the policy and given a commercial purpose. The object of the policy or a particular term must be ascertained on that basis.
- As observed in Power v Markel, the nature and purpose of any provision of the policy must be determined by its terms, not by a label, class or prior common experience given to it by others. This can prove difficult if the language (and terms) used in the extension are different from the language and defined terms in the balance of the policy.
- As noted in Intergraph, an inquiry extension should be seen as providing cover anterior to claims cover against an insured person. Cover is to be provided and at a time where there is often no claim and there may never be a claim. However, some extension wordings may be drawn to not provide entirely new cover and by their terms they may need to be read as operating within the other insuring clauses of the policy and the policy's overall purpose. Hence, some inquiry clauses limit cover to those inquiries that may have a connection to a claim, wrongful act or loss contemplated by the policy.
- A connection between the matters or conduct inquired of or investigated and the insured's business or profession is usually necessary.
- Where an extension requires, as a precondition, the possibility that a claim may arise, if the matters that are the subject of an inquiry touch upon matters that may give rise to a claim, that may be sufficient to enliven cover. Establishing the ingredients of a claim or actual loss suffered at that point may not be required. The courts appear to favour the advancement of defence costs if this criterion is met rather than a refusal.
- Similarly, if the claim for indemnity satisfies the terms of the extension, defence costs should be advanced, even though a claim may ultimately be excluded by other provisions of the policy, for example, the dishonesty exclusion. Those costs may be refunded or claimed back by the insurer pursuant to a specific term of the policy if it turns out that cover is excluded.
- Some courts have accepted that a criminal proceeding may be an investigation for the purpose of an inquiry extension. The broad language used to describe inquiries in these extensions would suggest a wide range of investigations are contemplated by the policy, rather than excluded.
- Historically, the courts have made a distinction between coverage for claims arising out of alleged criminal acts or omissions which involved intentional conduct, and those offences which arose out of negligence or inattention. The former is excluded from cover, the latter not. Such a distinction may be helpful in determining whether cover was intended for a particular investigation or inquiry.
- There is no common definition of the term "legally compelled", a usual pre-condition to cover. There are inquiry or investigation scenarios where we suspect an insured cannot be required or compelled to attend. We expect that a court would agree that an insurer did not haved a right to deny cover simply because an insured cannot be "compelled" to attend. Unless there is limiting language in the policy, a court, in endeavouring to give a commercial purpose to the policy, will find an insured should be provided with cover for defence costs for advice and representation, even if the insured never submits to an interview or declines to give evidence in a court or tribunal. TThe terms "compelled" or "required" should probably be seen as a pre-condition an insurer imposes to seek to ensure it is not obliged to cover less serious matters, and matters unrelated to the insured's profession or business. Nevertheless, clearer language would help to limit ambiguity.
- It is uncertain whether an inquiry extension extends to provide defence costs for a traditional criminal investigation, despite the fact that an investigation might have its origin under some legislation relevant to the insured's profession or business. For example, a real estate agent may be charged with a breach of the prohibition against dummy bids at auctions. A builder could be charged for undertaking building works without a planning or building permit. Both are criminal offences, commonly determined in traditional courts, yet the language of some inquiry extensions will be broad enough to offer cover.
Insurers should describe the scope and cover of inquiry extensions
Uncertainty in the ambit of cover can be alleviated by the careful drafting of inquiry extensions. They should describe the scope of cover by their language and the use of defined terms. Criminal investigations may be expressly covered or excluded. What events or acts trigger cover could be better described, so there is less uncertainty as to when it is said an inquiry commences or an insured is "compelled" to attend.
Insureds should seek broad inquiry extension and carefully review wordings
Insureds should carefully review their inquiry extension wordings to ensure they cover the type of investigations or inquiry they may be subject to. As it is difficult to foresee the next frontier of government supervision, this is not as simple as it sounds. For this reason, insureds should seek the broadest and widest of extensions.
Where the broadest of language in an extension is provided there will be a good basis to argue that the cover extends to a particular investigation or inquiry, even when it has not been expressly referred to in the extension wordings.