Directors and insurers can take heart from a recent Australian judgment that defence costs can be paid out of Directors & Officers (D&O) policies – even where third parties may have claims on the money and the pot is not big enough to cover both.
This reinforces the Court of Appeal’s ruling last year in the Steigrad case, and should increase the chances of that decision being upheld by the Supreme Court later this year.
The NSW Court of Appeal…
…held, in a comprehensively argued judgment, that directors’ legal costs payable under a D&O policy may be paid prior to any judgment or settlement notwithstanding that:
- the policy has an aggregate cover for both liability to third parties and the insureds’ defence costs, and
- the aggregate cover is likely to be exhausted if a third party claim succeeds.
The Court said it would be extraordinary if the effect of the law1 was to enable an insurer to refuse the directors’ contractual right to be indemnified for their (often weighty) legal bills on the basis that the insurer might be liable to pay out a third party claim at some time in the future.
The third party should not be in a more favourable position than an insured director where the obvious intention of the insurance contract is for the director to be indemnified for his or her defence costs as and when they are incurred.
The NSW Court of Appeal also gave some thought to the meaning of “actual notice” in section 6 – an issue not yet considered in New Zealand. The Court commented that, for the purposes of section 6, it is sufficient that an insurer have actual notice of the circumstances that give rise to the charge. It is not necessary for a third party to assert its entitlement to a charge.