The New Zealand Court of Appeal decision of Steigrad v BFSL 2007 Ltd & Ors1 was handed down this morning. The primary judge’s decision has been overturned.
After the primary decision in Steigrad was handed down, a similar issue arose in proceedings between Chartis and the directors of Feltex Carpets Ltd. Leave was granted for the Feltex proceeding to be heard at the same time as the Steigrad appeal.
The case concerned s 9 of the Law Reform Act 1936 (NZ). Section 9(1) creates a “charge” in favour of a third party on insurance monies paid or to be paid to indemnify an insured in respect of the insured’s liability to that third party. Analogous provisions exist in NSW, NT and ACT.
The two insurance policies in issue provided cover for liability incurred by the insured to third parties in specified circumstances and also provided for the reimbursement of the costs of defending any such third party claim. Both policies contained a single limit of liability covering both liability and defence costs claims. For further details on the background to the Steigrad decision, please see our alert here.
The issue for the Court of Appeal was how the charge created by s 9(1) operated on such policies, in particular in relation to the payment of defence costs after the charge has arisen and been notified. The essential question was:
“whether the phrase ‘all insurance money that is or may become payable in respect of that liability’ in s 9(1) includes insurance money that is or may become payable on account of an insurer’s liability to reimburse an insured party for defence costs incurred in defending a claim’.2
The Court of Appeal found that the appeal succeeded on two interrelated grounds:
- Section 9 does not by its terms apply to insurance monies payable in respect of defence costs, even where such cover is combined with third party liability cover and made subject to a single limit of liability; and
- Section 9 has limited effect and is not intended to rewrite or interfere with contractual rights as to cover and reimbursement.
The Court of Appeal found that under the terms of the QBE policy, QBE was liable to pay Mr Steigrad’s reasonable defence costs where cover has not been confirmed in writing. The Court found that the QBE policy distinguished between two distinct types of payment constituting covered losses for which Mr Steigrad may become legally liable on account of a claim made against him for any wrongful act:
- The primary loss envisaged by the operative provisions was payment of damages or compensation in satisfaction of a claim by a third party, such as Bridgecorp.
- The secondary but discrete loss was costs incurred in defending the primary claim.
Therefore, whilst the two losses may arise from one claim on account of the same wrongful act, Mr Steigrad was independently entitled to indemnity for his defence costs immediately after they were incurred, subject to conditions. The Court found that the insurance money to which Mr Steigrad was now contractually entitled in terms of s 9(1) is “all insurance money... payable in respect of that [defence costs] liability”, not “in respect of” his “...liability to pay any damages of compensation”. Section 9 was found not to apply because Bridgecorp was not entitled to a statutory charge over insurance money lawfully payable by QBE to Mr Steigrad to reimburse his existing liability to pay defence costs incurred with the insurer’s consent or otherwise.
The Court held that if there had been a separate defence costs policy, there would have been no suggestion that s 9 would have applied. Therefore combining the two forms of cover – defence costs and third party liability – in a single policy with separate sums or a single sum insured would not affect the outcome.
The Court held that it was irrelevant that the funds available to meet Bridgecorp's claim against Mr Steigrad will be progressively depleted by reimbursement of the defence costs as this was a necessary consequence of the policy structure.
Therefore the Court found that QBE would not be a volunteer to liability when discharging its contractual obligation. The primary judge’s conclusion to the contrary was found to have proceeded on a misconception of the case of Pattinson.3 Please see our previous alert on consideration of this point.
Interference with contractual rights
The Court also found that the effect of the primary judgment was to deny Mr Steigrad his contractual right to reimbursement of his defence costs as and when they were incurred which was inconsistent with the text, purpose and policy of s 9. The Court found that the purpose of s 9 was not to rewrite the bargain struck between the parties but largely procedural in nature by providing a mechanism whereby a third party claimant can access directly funds which an insurer is liable to pay its insured to meet the insured’s liability to that third party. The Court stated that this approach reflected what has been long recognised about s 9, namely that it takes effect subject to the terms of the contract of insurance as they stand at the time the charge descends.
The Court found that the statutory charge created by s 9 had not crystallised and remained contingent. It will not crystallise unless and until QBE becomes legally liable to meet any damages or compensation that Mr Steigrad must pay Bridgecorp, whether as a result of judicial decision, arbitration or settlement. That required, first, that Mr Steigrad’s liability to Bridgecorp be established; and second, that QBE’s liability to Mr Steigrad under the policy be established. At present QBE’s only crystallised liability was to pay Mr Steigrad’s defence costs.
The Court of appeal made the following declarations:
Where, by the terms of a liability policy, the insurer has agreed that:
- it will provide to the insured an indemnity against legal liabilities and against defence costs; and
- its maximum amount payable under the policy is a single aggregate limit, inclusive of both the amount of any legal liabilities and of all defence costs,
- the amount of the insurance money charged pursuant to s 9(1) of the Law Reform Act 1936 in favour of a claimant against the insured is the balance of the policy limit at the date when the insurer is required under the policy to discharge its promise to the insured to provide indemnity against the insured’s legal liability to the claimant (subject to s 9(3) in relation to prior charges).
Like the primary judgment the Steigrad appeal is not binding outside New Zealand, but courts in other jurisdictions may consider it persuasive in those Australian jurisdictions that have similar legislation. The outcome of this case will have ramifications in the D&O policy market and the defence costs only policies which have been developed.
Some preliminary questions which arise from the Steigrad appeal is whether the result would differ if the definition of ‘defence costs’ under the policies refer not only to the incursion of the insured’s own defence costs but also a liability to pay costs orders to another party? Is the Court’s finding that the statutory charge created by s 9 does not crystallise until the establishment of QBE’s liability to pay the insured consistent with cases which have found that whatever completes the cause of action against the insured is what causes the charge on the insurance moneys to arise4?
We do not yet know whether this decision will be appealed.