Directors, D&O Cover and Defence Costs – The Supreme Court’s Final Word

POSTED BY Karl Stolberger
Stephanie Nicolson
30 January 2014

posted in Caselaw | Insurance | Litigation | Bridgecorp

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In June last year we commented on on-going litigation between the Receivers of various Bridgecorp companies and their directors in relation to a $20 million D&O insurance policy (see Section 9 Law Reform Act 1936 - Charges against Insurance Money).  At issue was the Receivers’ ability to assert a charge over the proceeds of the policy in favour of Bridgecorp’s investor creditors, thereby preventing the payment out of insured defence costs to claimant directors. In a recent judgment the Supreme Court, overturning the decision of the Court of Appeal, has now ruled in favour of the Receivers.

Section 9 of the Law Reform Act 1936 allows an injured third party to claim a charge over insurance money that may be payable by an insurer to an insured wrongdoer. The charge arises on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined. It allows the third party to claim directly against the insurer. (Thus the charge is not available to directors for defence costs. Such a claim obviously involves first party cover and does not involve a third party liability.) Often section 9 comes into play where the insured wrongdoer is insolvent, but it is not limited to such cases. It applies equally to protect against a solvent insured receiving payment from its insurer and absconding with the insurance pay-out meant ultimately to compensate the victim. Under section 9 the injured third party can thus obtain compensation for the damage for which the wrongdoer took out insurance, subject to the terms and limits of the applicable policy.

The Bridgecorp D&O policy provided cover in respect of directors’ liabilities to third parties such as for misleading statements, omissions, negligence and breaches of duty. It also provided the directors with cover for legal defence costs. The policy limit combined compensation in respect of claims by injured third parties and coverage for directors’ defence costs in one sum. This had the unintended consequence for both insurer and insured directors, that when the Receivers (acting in the interests of Bridgecorp investors) asserted their charge over the insurance proceeds, the charge also threatened to prevent payment out of the defence costs portion of the policy, meaning that the directors of Bridgecorp did not have access to their insurance policy to fund lawyers and experts to mount defences to the complex proceedings against them.

The directors sought a declaration in the High Court that the Receivers’ charge only applied to the compensation part of the policy, leaving the insurer free to pay defence costs to the directors in accordance with the policy. The directors were unsuccessful in the High Court, Steigrad v BFSL 2007 Ltd (2011) 16 ANZ Insurance Cases 61-910 (Lang J), but then won in the Court of Appeal, Steigrad v BFSL 2007 Ltd [2013] 2 NZLR 100 (O’Reagan P, Arnold and Harrison JJ) and so after a further appeal by the Receivers was brought, the matter came for determination by the Supreme Court.

The Supreme Court, by a 3:2 majority, found that the Receivers’ charge indeed secures the full insurance sum, including the part that would have otherwise been paid to the directors in defence costs. The majority was not persuaded to read section 9 in a manner which would have had the effect of making a third party claim subservient to payment of directors’ defence costs. In concluding their judgment, the majority stated that "… An insurer may thus be entitled to be cautious about paying out defence costs where it has knowledge of a third party claim, which exceeds the limit of the policy, remains outstanding.” However they left open the question whether an insurer would be entitled to refuse to pay defence costs where there was a risk that the policy limit might be exceeded, to a case where that was clearly in issue. Clearly any payment made in respect of defence costs prior to resolution of all claims against the policy, is now made at the insurer’s risk.

The decision appears to put New Zealand at odds with the position in Australia, which was recently considered by the New South Wales Court of Appeal in Chubb Insurance Co v Moore [2013] NSWCA 212, (2013) 302 ALR 101.

The Supreme Court’s decision has significant impact on the insurance industry and on the way that insurance policies should be drafted in the future. In particular, separate policies providing cover for compensation and defence costs should be considered, or at least, in the case of a single policy, pools of funds for compensation and defence costs should be clearly quarantined so that they are each separately defined and available for the respective categories of claim. As a consequence of the Supreme Court’s decision insured’s should speak with their insurers or brokers to make sure that they are adequately covered for defence costs.

Lowndes Jordan acted as instructing solicitors for the respondent in the Bridgecorp appeal, which was heard together with a companion appeal, Houghton v AIG Insurance NZL SC 21/2013 in connection with the Feltex Carpets collapse.

POSTED BY Karl Stolberger
Stephanie Nicolson
30 January 2014

posted in CaselawInsuranceLitigationBridgecorp

VIEWED 13341 TIMES

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