In a decision which will be welcomed by insurers and directors/officers alike, the NSW Court of Appeal has handed down a unanimous judgment in Chubb v Moore1.

The Court was asked to consider whether a statutory charge created by section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the Act) could effectively prevent an insurer from advancing defence costs to an insured (making any such advancements, in effect, a voluntary payment).

Ultimately, the Court answered this question on grounds of territoriality, holding that no charge under the Act could arise over any money payable under a D&O policy where proceedings were instituted outside NSW.

Unfortunately, the fact that the claim did not pass this threshold step means that the Court's firmly expressed view that, regardless of the territorial issue, section 6 does not create a charge over amounts paid as defence costs, must be considered obiter dicta, albeit persuasive.

While not binding on Australian courts, the first instance Bridgecorp decision handed down on 15 September 2011, which held that equivalent New Zealand legislation could create a charge over defence costs, caused shockwaves throughout the Australian and New Zealand D&O market, leading to the restructuring of some D&O policies (to ensure directors have access to funds for defence costs) and the creation of entirely new insurance products such as D&O "companion policies".

The comments of the Court in Chubb v Moore, particularly when viewed against the backdrop of the New Zealand Court of Appeal's decision to overturn Bridgecorp, go a long way towards clarifying the rights and positions of D&O insurers and insureds in New South Wales.

Background

The NSW Court of Appeal was asked to answer a number of questions relating to section 6 charges which had been sought in several proceedings in the Supreme Court of Victoria and in the Supreme Court of Western Australia (together, the Great Southern Proceedings).

The Great Southern Proceedings arise from the collapse of Great Southern Limited and its subsidiaries, in which the claimants seek damages from a number of former directors and officers of Great Southern companies.

The claimants allege that the directors and officers committed contraventions of the Corporations Act 2001, the Australian Securities and Investments Commission Act 2001, the Fair Trading Act 1999 (Vic) and the Fair Trading Act 1987 (WA). The directors and officers are insured under D&O policies which provide a costs inclusive limit of cover.

In the face of mounting defence costs, and the likelihood that any judgment against the directors and officers would exceed policy limits, the insurers could not wait for the determination of all the Great Southern Proceedings before dealing with the implications of section 6. On that basis, the Court was asked to clarify how the Act applies and determine whether insurers could pay defence costs under the relevant D&O policies before any third-party claim on the policy proceeds.

The NSW Court of Appeal's Findings

The Court found that section 6 of the Act does not operate, and therefore no charge descends, where proceedings are instituted outside NSW. Having made this finding, the Court was not required to deal with any of the other questions that had been raised by the parties.

However, appreciating the need to provide some clarity in this area, the Court went on to state that, in its view, a statutory charge under section 6 can affix only to amounts paid directly for the indemnification of an insured for moneys owed to a claimant. The Court is firmly of the view that a section 6 charge cannot descend over defence costs payable by an insurer prior to judgment or settlement.

The Court went on to provide further commentary on the scope and operation of section 6, stating that:

  • such a charge operates over both claims made and occurrence-based policies;
  • for such a charge to descend over moneys payable under a claims made and notified policy, both the event giving rise to the claim and the notification must occur during the policy period;
  • a section 6 charge can descend on moneys which are to be paid in satisfying a claim against the insured, not over moneys to be advanced by the insurer to the insured by reason of contractual agreement to pay defence costs and other costs incurred by the insured; and
  • where there are multiple claimants and the insurer advances moneys to satisfy judgment or settlement with some but not others, this will be a valid discharge of the insurer's obligations (and erode the relevant limit of liability) even if the payment is made prior to the entry of judgment or settlement with the other claimants.

Implications

Although Chubb v Moore was ultimately resolved on a threshold issue, insurers and insureds will be pleased that the Court elected to provide its clear views on the scope and operation of section 6 of the Act.

In acknowledging the confusion which this provision has created, their Honours went so far as to suggest that "Section 6 should be repealed altogether or completely redrafted in an intelligible form, so as to achieve the objects for which it was enacted".

The decision goes a long way towards resolving the uncertainty in this area, which has over the past few years given rise to a great deal of debate about the language used not only in D&O policies, but all insurance policies where the limit of cover is cost inclusive.

Chubb v Moore will be viewed as a victory for the seven insurers that sought a declaration from the Court that they were entitled to pay legal costs before damages or compensation that could become payable under shareholder class actions. Directors and officers will also sleep better knowing that, in NSW at least, the better view is now clearly that section 6 will not allow a party to place a charge over amounts paid to insureds as defence costs.

In addition, for a number of years now, Victoria has sought to position itself as a plaintiff-friendly jurisdiction, especially in the context of representative or class action proceedings. On one view, Chubb v Moore may encourage the institution of proceedings in NSW, in matters with limited territorial connections to NSW, in order to assert statutory charges under section 6.

Further guidance in this area will be gained from across the ditch, when the New Zealand Supreme Court considers the Bridgecorp appeal. Judgment in that matter is expected next year.