Unfortunately for many, particularly company directors, working in a more and more litigious environment, accessing defence costs under a contract of insurance cannot be done quickly enough.
But that is easier said than done. There can be questions about what the policy means and what barriers are in place before the funds will be made available. There may even be a tinge of regret that these questions were not carefully considered at the time the contract was taken out.
The meaning of an insurance policy is a topic about which I have written before. Finding that meaning is fundamental to resolving many if not every insurance dispute.
The principal aspects in that exercise are the policy’s words and the context in which those words were agreed upon.
It is important to keep in mind that the terms which are being read are the terms of a contract of insurance underpinned by nuances and unique obligations all of which must be considered in finding their meaning.
Even so at the end of the day those terms are the terms of a commercial contract and that is how finding their meaning is to be approached.
Once the meaning of the policy has been found, that meaning will dictate whether defence costs are available and, more importantly, when.
The meaning will reveal key marker or combination of key markers. Those markers dictate when the obligation to pay defence costs arises.
The policy may prescribe that the insurers must undertake a preliminary step before they withhold or advance defence costs. Such a step may involve a particular investigation or even a court finding.
Terms prescribing such a step may be a barrier to the payment of defence costs. For example, if a relevant exclusion requires facts to be adjudged before the exclusion applies, the existence of such a requirement favours the insured. The insurer cannot rely upon the exclusion as a barrier to meeting its obligations until after the requirement has been satisfied and satisfied in the insurer’s favour.
An Obligation to ‘Advance’ Defence Costs
There must be a term requiring the insurer to advance defence costs. Such a term will clearly point to an obligation on the insurer to make payments before any issue of indemnity has been finally resolved.
An obligation to indemnify an insured in respect of its defence costs does not necessarily equate to an obligation to advance defence costs.
An Obligation to Reimburse
An insurer’s obligation to advance defence costs is usually matched by its insured’s obligation to reimburse those defence costs if it is ultimately determined that the relevant policy does not respond.
No obligation to reimburse is consistent with a finding that there is no obligation to advance costs.
Surrounding the terms which reveal the timing of any payment, there may still be terms which have to be followed before the obligation to pay arises. The classic example of such a term is securing the insurer’s prior written consent.
While such terms are not to be ignored, it is important to remember that Section 54 of the Insurance Contracts Act may assist if those terms are overlooked.
The immediate point is often not whether defence costs are available. The immediate point is when.
The key point is that Insured need to address this issue when they purchase the policy not when they purchase the legal services.
For a good recent case on this topic see: Evolution Precast Systems Pty Ltd v Chubb Insurance Australia Limited  FCA 1690 (24 November 2020).