Many readers will by now be aware that on 20 December 2012 the New Zealand Court of Appeal allowed an appeal against a September 2011 single judge decision,1 the effect of which was to deny directors and officers insured under a D&O policy access to the insurance to fund the defence of claims against them. 

The 2011 decision concerned the application of section 9 of the Law Reform Act 1936 (NZ) (Law Reform Act), which is equivalent to legislative provisions in NSW, the ACT and the NT, which the primary judge found created a ‘statutory charge’ on the insurance which operated for the benefit of third party claimants. By its December 2012 decision, the New Zealand Court of Appeal overturned this decision, ruling that section 9 of the Law Reform Act does not apply to insurance monies payable in respect of defence costs.

Whilst this decision of the New Zealand Court of Appeal provides some clarity, the position in Australia is still unclear. 

This point was taken by the claimants in the Centro class action litigation in 2012. Whilst the New South Wales Court of Appeal assembled a five-member court to consider the issue on an expedited basis, the overall resolution of the Centro class actions meant that the issue had become moot, and the hearing did not proceed. 

It is understood that the point has also been taken by the claimants in the Great Southern managed investment scheme litigation underway in the Supreme Court of Victoria, and that once again the New South Wales Court of Appeal has assembled a five-member court to hear an application by the insurers for a declaration as to the operation of the New South Wales equivalent of section 9 of the NZ Act. The application is listed for hearing on 19 March 2013.

It remains to be seen whether this application will proceed having regard to the decision of the New Zealand Court of Appeal.

The insurance industry had responded to the 2011 Bridgecorp decision by offering separate defence costs policies, or policies with separate cover and limits for defence costs and for liability arising from claims. Pending resolution of the issue in Australia, it would seem prudent for insureds to continue to avail themselves of these offerings in the market.

Background

Bridgecorp comprised a group of New Zealand finance companies that collapsed in 2006. Following the collapse, Bridgecorp brought proceedings against certain of its directors on the basis that they were alleged to have breached duties owed to the company in their capacity as directors. The claims were for amounts in excess of the potentially available insurance cover.

Bridgecorp had arranged insurances with QBE Insurance, including a D&O policy which indemnified the directors against liability and also provided for payment of defence costs.

Bridgecorp notified QBE of its assertion of a charge under section 9(1) of the Law Reform Act in respect of their claims against the directors. Section 9(1) provides:

If any person (hereinafter in this Part of this Act referred to as the insured) has, whether before or after the passing of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, 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, be a charge on all insurance money that is or may become payable in respect of that liability.

The directors applied to the New Zealand High Court for a declaration that 9(1) did not prevent QBE meeting its obligation to reimburse them for their defence costs. 

In September 2011, Lang J of the New Zealand High Court held that a charge had been created by section 9(1) which applied to the whole of the amount available under the policy (given that the amount of the claim exceeded the policy limit), with the consequence that the charge prevented the directors from having access to insurance money to meet their costs of defending the claims against them.  

Decision of the New Zealand Court of Appeal

Mr Steigrad, one of the Bridgecorp directors, appealed to the New Zealand Court of Appeal. On 20 December 2012 the New Zealand Court of Appeal unanimously allowed the appeal and quashed the High Court decision. There were two primary bases given for this decision:

  1. by its terms, section 9 does not apply to insurance monies payable in respect of defence costs, even where cover for defence costs is combined with third party liability cover and made subject to a single limit of liability; and  
  2. section 9 is not intended to rewrite or interfere with contractual rights as to cover and reimbursement set out in the policy of insurance.

In relation to 1, the Court of Appeal found that under the QBE policy Mr Steigrad was independently entitled to indemnity for his defence costs immediately after they were incurred, and that no charge descended in respect of these costs. The court reasoned that combining the two forms of cover, defence costs and third party liability, in a single policy subject to a single limit did not change this analysis. It also found that the statutory charge created by section 9 had not crystallised and remained contingent unless and until QBE became legally liable to meet any damages or compensation that Mr Steigrad was ordered to pay Bridgecorp. 

In relation to 2, the court held that section 9 is largely procedural in nature and is subject to the terms of the contract of insurance as at the time the charge descends. 

It was also noted that the effect of the original Bridgecorp decision was to render Mr Steigrad’s defence costs cover, in practical terms, useless and that this was not what section 9 was intended to achieve. 

What is the position in Australia?

Neither the original Bridgecorp decision nor the decision of the New Zealand Court of Appeal is binding in Australia. However the Court of Appeal decision should provide some comfort and clarity to both directors and insurers who are parties to insurance contracts with a single limit for defence costs and liabilities. 

Nonetheless, until the matter has been judicially considered in Australia, some uncertainty remains as to the effect of the Australian legislative provisions equivalent to section 9 of the Law Reform Act . 

It is also worth noting that the Court of Appeal decision may be appealed to the New Zealand Supreme Court.

Matters to note

Following the 2011 Bridgecorp decision, some insurers offered separate policies for defence costs or offered separate cover within liability policies with a separate limit for defence costs. However, directors insured under existing policies with a single limit remained vulnerable to third party claimants asserting charges in reliance on Bridgecorp.

The New Zealand Court of Appeal decision significantly diminishes the potency of these asserted statutory charges. However, until the legal position in Australia is settled, it remains prudent for directors to ensure that they have the benefit of D&O policies with a separate limit for defence costs.