A December 2013 decision of the New Zealand Supreme Court fundamentally influenced the treatment of competing interests under directors’ and officers’ liability policies. This article considers the impact of that case on the Australasian insurance market and its potential impact in the UK.
In 2007, the Bridgecorp group failed and went into liquidation, owing investors $500 million. Several directors of Bridgecorp (including Mr Steigrad) were convicted of offences under New Zealand securities laws. The receivers of Bridgecorp brought civil proceedings against the directors on behalf of the investors. Bridgecorp alleged that the directors had breached their duties and claimed damages exceeding $NZ340 million.
Bridgecorp had a directors & officers (D&O) policy with a combined limit of indemnity for both liability and defence costs of $NZ20 million.
The directors claimed their defence costs under the D&O policy. Bridgecorp challenged this on the basis of section 9 Law Reform (Miscellaneous Provisions) Act 1936 (a New Zealand statute), by which a third party can charge the money available under the policy subject to providing insurers with notice of the charge. Thus the insurance money cannot be paid to anyone else after notice of the charge is given.
The directors argued that the charge did not take effect until the money became due to the third party investors on judgment or settlement so that the directors’ claim under the policy for their defence costs took priority over the investors’ claim. The issue was when, on the true interpretation of section 9 Law Reform Act, a third party charge become enforceable?
Decisions in the Supreme Courts and the Courts below
At first instance, the High Court found that Bridgecorp had a charge over the insurance money ranking ahead of the directors’ claims. The Court of Appeal reversed that decision in favour of the directors on the basis that the investors’ charge only took effect after the defence costs had been met.
The New Zealand Supreme Court overturned the Court of Appeal’s decision by a majority of three to two. The majority concluded that the statutory charge arose on the occurrence of the event giving rise to the claim, rather than the date of judgment or settlement and that the charge secured the full amount payable subject to the limit of indemnity. Defence costs reserves did not escape the charge and it was immaterial that the directors’ were obliged to pay defence costs before Bridgecorp’s claim crystallised.
The dissenting minority expressed concern because the decision interfered with the ability of an insured to defend third party claims. They cited the New South Wales’ Court of Appeal’s decision on similar legislation in Chubb Insurance in support of their position. Chubb decided that insurers were contractually bound to pay defence costs, and it could not be a defence that the sums in questions might later be called on to satisfy a judgment against the Insured.
The Supreme Court in Steigrad considered that the policy had not been designed to deal with the conflict that arose in this situation. They raised the question (although made no findings either way) of whether insurers should meet the directors’ defence costs in addition to the limit of indemnity.
Effect on insurance markets in New Zealand and Australia
The Supreme Court’s decision allows investors in failed finance companies with claims against directors to claim the full amount of all available insurance money. The position is unclear as to whether, in such circumstances, insurers will be liable to pay defence costs in addition.
Ever since the High Court decision, insurers in New Zealand have responded by offering separate policies or single policies with separate limits for third party liability and defence costs. In Chubb, the court suggested that separate limits within the same policy may not be sufficient because the situation could still arise where the defence costs limit had been eroded but the claim remained ongoing (therefore jeopardising the defence of the claim).
Commentators have also suggested that the impact of the decision may be felt outside the D&O market and might apply to any liability policy, such as EL/PL policies, where defence costs are not already in addition. Despite the Australian Court of Appeal finding to the contrary, insurance markets in Australia have also responded in a similar way.
What does this mean for the UK insurance market?
Neither Steigrad nor the Chubb decisions are binding in the UK courts and were decided on the basis of legislation which differs from that in England. In England, the equivalent legislation is the Third Party (Rights Against Insurers) Act 1930, soon (hopefully) to be superseded by the Third Party (Rights Against Insurers) Act 2010. Both Acts differ from the law in Australasia:
- They afford rights to third parties only where the insured is bankrupt or insolvent. The Australasian legislation confers third party rights in a wider circumstances.
- They do not give a third party the right to “charge” the insurance money. Instead, they transfer the rights of the insured to the third party in a liability policy.
It remains to be seen whether attempts will be made to argue that the English legislation operates in a similar way. There would be serious problems with an argument that legislative provisions specifically aimed at the indemnity payable under liability policies should be extended to an indemnity for defence costs payable to the insured. The conventional structure of English D&O policies does not, however, distinguish between the indemnity for third party liability and the first party indemnity for defence costs. That might make a Steigrad challenge easier.
In practical terms, though, the immediate issue for the London market is likely to be the impact ofSteigrad on claims made in Australasia on policies written in the London market for, in particular, insureds based here. The problem ought not to arise if the policy contains an English proper law and jurisdiction clause. Its absence could give rise to some difficult issues. More generally, however, it may be that the time is ripe for a wider review of the structure of D&O cover.