The NSW Court of Appeal has considered whether NSW legislation which creates a statutory charge over insurance moneys in favour of third party claimants applies to advancement of defence costs under a D&O policy. This was a significant issue for directors and officers. If the charge applied, it would mean that insurers could not safely advance defence costs if the potential claim liability was greater than the insurance cover, thereby effectively depriving directors and officers of one of the principal benefits of their insurance cover.
This issue came up for consideration in the Great Southern class action. The insurers of directors and officers joined as defendants in those proceedings sought a ruling on whether the statutory charge applied.
The Court held unanimously that the NSW legislation only applies to proceedings brought in NSW courts, which means that directors currently defending proceedings in the Great Southern class action and other litigation before the Victorian and WA Supreme Courts will not be prevented from accessing their D&O defence costs, despite the existence of potential third party claims on the same policy: see Chubb Insurance Company of Australia Ltd v Moore  NSWCA 212.
The Court also considered what would happen in NSW court proceedings, and concluded that, in any event, the statutory charge created by the NSW legislation would not extend to cover moneys payable for defence costs (in contrast to payments made for liability). In this regard, the Court reached the same conclusion as that of the New Zealand Court of Appeal in Steigrad v BFSL 2007 Ltd  NZCA 604 (see our recent article here and the discussion in our Year in Review report here).
As a result of the collapse of agribusiness company Great Southern Limited and its subsidiaries (Great Southern Group), class action proceedings and other litigation were commenced in the Supreme Courts of Victoria and Western Australia. In these proceedings, the plaintiffs claim damages from former directors and executives of the companies in the Great Southern Group, as well as a group company, for breaches of the Corporations Act 2001 (Cth) and other legislation. If they succeed in the litigation, the plaintiffs could effectively become third party claimants on the D&O insurance policy by operation of section 6.
Legal issue and conclusions
Conflict between D&O policies (and other liability insurance) and statutory charges arises where:
- a policy makes insurance moneys available in advance to an insured to cover their defence costs; but
- section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (section 6) gives a third party claiming against an insured (whether as part of a class action or individual proceedings) access to those same insurance moneys.
The key question at issue in the case before the Court of Appeal was whether section 6 affects the making of an advance payment by insurers of defence costs to insureds in these circumstances.
The Court held that, in the circumstances, section 6 could only apply to give rise to a statutory charge if the proceedings were commenced in a NSW court. In the Court’s view, it was unnecessary to consider the law of the policy, the place where the policy contract was made, the place where the events giving rise to the third party claim occurred or any other factors that might create a connection between the dispute and NSW. On this basis, the Court concluded that section 6 had no application to the Great Southern proceedings.
Despite this finding, the Court also considered whether, if proceedings were to be brought in a NSW court, the section 6 statutory charge would attach itself to D&O insurance moneys payable for defence costs, thereby preventing an insurer from making advances to an insured in any proceedings. The Court took the view that the charge did not attach to those moneys, recognising that provisions of insurance policies that provide for an insured to receive advances in respect of their defence costs:
provide a valuable benefit to the insureds. They ensure that the insureds are not placed in the invidious position of having insufficient resources to defend major claimswhile the insurers consider the question of indemnity (at ).
Any other interpretation would leave insurers in a position where they could not safely pay defence costs if there were any possibility that the ultimate liability of the insured to third parties might exceed the amount available to meet that liability at some time in the future. As the Court noted, there was nothing on the face of section 6 to suggest an intention on the part of Parliament to affect the contractual rights of the parties in such a “radical” fashion.
This is a welcome decision for directors and officers and their insurers, who are increasingly faced with litigation risks, including in class actions.
While the Court of Appeal’s comments about defence costs were dicta, the decision also adds much needed certainty to existing jurisprudence around the applicability of section 6 in any particular case. In setting out its conclusions, the Court emphasised that its approach was intended to accord with the policy and language of the provision. Uncertainty remains around the operation of s 6 and insureds should continue to consider whether defence costs only cover is appropriate.
The Court also acknowledged at a number of points that the complexity and opacity of section 6 provide good reason for the section to be repealed or redrafted in an intelligible form, so as to achieve the objects for which it was enacted.