The statement of claim arrives. Your company is being sued over professional advice, a failed project or a commercial transaction. A director is named personally. Solicitors need instructions, evidence must be preserved and a defence is due.
You notify the insurer. Its reply says that indemnity remains under consideration. In the meantime, it will not approve the lawyers' fees.
For the business, the immediate problem is cash flow. The claim must be defended while the insurer decides whether the policy responds. A substantial policy limit offers little comfort if the business must fund every invoice itself.
An unresolved coverage dispute does not, by itself, answer who must pay the legal bills now. That question requires a separate look at the policy's defence costs provisions. An obligation to fund a defence can operate before liability to the claimant has been established. Its scope depends on the wording, the allegations and the grounds on which cover is disputed.
01 What did the insurer promise to pay?
Start with the actual promise. Professional indemnity, directors and officers, management liability and public liability policies do not all deal with legal costs in the same way.
Some policies allow or require the insurer to take over the defence and appoint lawyers. Others leave the insured responsible for defending the claim, subject to provisions for paying approved costs. An advancement clause may require reasonable defence costs to be paid as they are incurred, subject to conditions and a possible obligation to repay.
Payment at the end of the case and funding throughout it have very different commercial consequences. Check whether the wording addresses advancement, reimbursement or control of the defence, and when payment falls due.
Also check the definition of defence costs. It may distinguish responding to a civil claim from attending a regulatory investigation, pursuing a counterclaim or obtaining advice about the insurance cover itself. Legal work connected with the same events does not necessarily fall within the same benefit.
The schedule, wording and endorsements must be read together. A certificate of currency will rarely answer these questions.
02 Why defence funding is being refused
An insurer refusing defence costs may be disputing whether the claim falls within the policy at all, rather than simply questioning the size of an invoice. Identify which issue is actually in dispute.
- The insured person or entity. Does the policy cover the company, the director or both, and in the capacity in which each is being sued?
- The activity and alleged liability. Does the claim concern the professional services or business activities insured? Is the insurer relying on a contractual liability or other exclusion?
- The policy period. When was the claim first made, and what was notified to the insurer? Earlier demands and correspondence may matter.
- The costs themselves. Were the lawyers and the expenditure approved, and are the amounts within the policy's definition and conditions?
These questions need separate answers. A D&O policy covering a director does not necessarily cover the company's own liability. Equally, an objection to one category of expenditure does not explain why every defence invoice should remain unpaid.
Our article on the $3.7 million insurance gap examines the distinction between being an insured and performing an insured activity. In a defence costs dispute, that distinction should be checked early.
03 Allegations of dishonesty and the Wilkie decision
An allegation of fraud can make a coverage letter look decisive. Whether it justifies withholding defence costs depends on the exclusion and the funding clause.
In Wilkie v Gordian Runoff Ltd [2005] HCA 17, an insured facing proceedings sought advance payment of defence costs. The insurer relied on a dishonesty exclusion. Under that particular wording, the misconduct had to be established by admission or adjudication before the exclusion applied.
Neither had occurred. The High Court held that the insurer could not rely on the exclusion to refuse advancement in anticipation of the event the wording required. The policy also allowed the insurer to recover the payments if it was later established that there was no entitlement to indemnity.
Wilkie does not establish that every allegation of dishonesty must be funded. Different exclusions are drafted differently, and other coverage grounds may remain available.
In Rich v CGU Insurance Ltd [2005] HCA 16, decided the same day, the High Court identified a separate issue: if the insurer successfully avoided the policy for fraudulent non-disclosure or misrepresentation, that would also defeat the provision relied on for defence funding. The Court revoked special leave; it did not decide that any fraud had occurred.
The practical question is which ground the insurer relies on, and what must happen before that ground can operate.
04 Reservations of rights and repayment
A reservation of rights usually identifies coverage questions the insurer is keeping open. Read it alongside the insurer's actual position on funding: it may agree to pay, offer only part payment or withhold approval pending further information.
Ask for clarity about what will be paid now and on what conditions. If the insurer proposes interim funding, examine any repayment undertaking before signing it. Compare it with the existing policy rather than assuming it merely repeats the contract.
Points to resolve include the invoices covered, the allocation applied, who could be asked to repay, and the event that would trigger a repayment demand.
An interim arrangement can keep a defence moving, but its financial consequences need to be understood. The business should also record any disagreement with the insurer's stated grounds rather than leaving its position unclear.
05 Choosing lawyers and obtaining consent
The business may want its usual commercial solicitors. The insurer may propose a panel firm or approve only particular rates.
Check who controls appointments under the policy. A preference for an existing adviser does not itself establish an entitlement to have that firm's invoices paid. Where the conduct of the defence could affect a disputed coverage issue, consider whether a conflict requires separate advice or representation. A reservation of rights does not automatically create that need. Explain the reason for any separate appointment and seek written agreement on its scope and cost.
Before substantial expenditure, send the insurer the proposed team, rates, immediate work and budget. Ask it to identify any objection promptly and to specify what it will approve. If urgent protective work cannot wait, record the deadline and why the work is necessary, and check for any emergency costs provision.
Section 54 of the Insurance Contracts Act 1984 (Cth) may prevent an insurer from refusing to pay merely because of an act or omission after the contract was entered into, subject to its requirements, including those concerning prejudice and causation. It does not make consent requirements optional or guarantee recovery of every unapproved invoice.
Our section 54 article explains the statutory protection in more detail. Obtaining approval remains preferable to litigating about its absence.
06 Allocating costs and protecting the policy limit
One proceeding may name several defendants and advance several causes of action, only some of which are covered. The insurer may therefore propose an allocation between insured and uninsured matters.
Ask how the proposed allocation follows from the clause and the work. Counting allegations or defendants may not reflect the effort required to defend the covered claim. Identify common factual work, and separately identify work done solely for an uninsured party or issue. Check whether the policy supplies a process for resolving disagreement.
For example, preparing a witness on the same transaction may assist both a director and the company. A separate counterclaim may involve additional work. Those tasks deserve examination before a single percentage reduction is accepted across every invoice.
Also check whether defence costs erode the overall limit, are payable in addition to it, or have their own sublimit. An excess or retention may apply to costs as well as damages, and other claims may draw on the same aggregate limit.
A defence budget should therefore track both the immediate funding requirement and the cover remaining for settlement or judgment. Every dollar spent on the defence may be a dollar no longer available to resolve the claim.
07 Challenging a refusal to fund the defence
An effective challenge addresses the particular policy clause and the insurer's stated reasons. Assemble the complete insurance documents, pleadings, notification history, consent requests, budgets and unpaid invoices.
The response should identify the funding obligation relied on, explain why it has been triggered and separate any disputed expenses from amounts that can be agreed. A request for payment should be supported by the work performed and the contractual basis for recovery.
Where the Insurance Contracts Act applies, section 13 implies a duty of utmost good faith in matters arising under or in relation to the policy. That duty does not make every disputed refusal unlawful. Under section 57, interest may be payable on an amount owed from the date on which it became unreasonable for the insurer to withhold payment.
If correspondence does not resolve the issue, consider proceedings for declarations about the funding obligation and recovery of amounts due. The urgency of the underlying case may justify an expedited timetable, but the evidence and relief sought need careful preparation, and an urgent application does not guarantee immediate payment.
The Australian Financial Complaints Authority should not be assumed to be available. Its Rules exclude small business complaints about liability cover, including public and products liability and professional indemnity insurance. Eligibility depends on the complainant, the product and the Rules in force at the time.
The insurance dispute also has its own time limits. Neither negotiation nor a complaint should be assumed to extend a court deadline.
08 What to do when proceedings arrive
The underlying claim continues while insurance is being discussed. The first steps should protect both positions.
These steps make the dispute easier to assess and reduce uncertainty about who must do what while the claim proceeds.
09 How GopherWood Lawyers can help
GopherWood Lawyers acts for policyholders in defence costs and indemnity disputes.
We review the policy, the claim documents and the insurer's correspondence together. We advise on funding obligations, prepare consent requests, negotiate disputed allocations and pursue declarations or reimbursement where appropriate.
If your insurer is refusing to pay the legal bills, bring the complete policy, the statement of claim, the insurer's response and the current costs estimate to our first discussion, and tell us about any approaching court date or funding deadline.
Call 02 9160 2157 or contact GopherWood Lawyers about your insurance coverage dispute.
This article reflects material reviewed on 3 November 2026. It provides general information about Australian law and is not legal advice. Entitlement to defence costs depends on the policy, the facts and the applicable law.
10 Sources and further reading
- Insurance Contracts Act 1984 (Cth): especially ss 13, 28, 54 and 57.
- Wilkie v Gordian Runoff Ltd [2005] HCA 17: advancement of defence costs and the particular dishonesty exclusion.
- Rich v CGU Insurance Ltd [2005] HCA 16: the separate avoidance issue and the revocation of special leave.
- AFCA, information for small businesses: insurance exclusions; the current Rules must be checked for any particular complaint.