Court clarifies scope of D&O indemnities?

Do directors' indemnity deeds require companies to fund directors who take personal defamation actions? Or are the indemnities limited to defence? The NSW Court of Appeal's decision in NRMA v Whitlam has clarified the scope of the company indemnity considered in that case and will provide guidance in this area.

Mr Whitlam was a director of NRMA who in that capacity was interviewed by a television program. Believing that he had been defamed when extracts from the interview were published, he began defamation proceedings, and asked NRMA to indemnify him for his legal costs, under the deed of indemnity that the company had given him.

The deed of indemnity indemnified Mr Whitlam for all "Liabilities" incurred by him as an officer of any NRMA Group Company. The term "Liabilities" was defined to mean "any loss, liability, cost, charge or expense". Mr Whitlam's view (with which the trial judge agreed) was that

• his loss of reputation was a "loss" as defined in the deed of indemnity, and when a loss is within the scope of a contract of indemnity, the indemnity also covers the cost of taking reasonable steps to mitigate the loss, in this case, the legal costs of bringing the defamation action; or
• his legal costs were "costs, charges or expenses" under the deed and had been incurred by him as an officer of NRMA; or
• apart from the D&O indemnity, NRMA still had to pay his costs at general law because in bringing the action, he had acted on its behalf.

The NSW Court of Appeal rejected all these arguments. It found that the indemnity did not cover loss of reputation, and that while the statements made by Mr Whitlam in the interview were made by him in his capacity as a director of NRMA, his commencement of defamation actions and incurring of legal costs in those actions were not part of his duties as an officer of NRMA and therefore the costs were not "Liabilities" as defined by the deed of indemnity.

The Court rejected the last point on the basis that, unless the right to indemnity could be found in the express terms of the deed of indemnity, there was no basis to imply an obligation upon NRMA to indemnify for matters not covered by the deed.

It's important to note that the Court did not say that D&O indemnities could never cover the costs of an action commenced by a director or officer (indeed, many expressly contemplate it as part of the defence of a claim). Its decision was limited to defamation actions of the sort begun by Mr Whitlam. As we noted at the time of the original decision in this case, it's important always to carefully consider the scope of the indemnities offered to directors and ensure, to the extent possible, that those indemnities are aligned to your D&O cover and that what is and is not covered is understand by all concerned.