In a recent High Court decision* concerning a claim by the receivers of Bridgecorp against the Bridgecorp directors, the court ruled section 9 of the Law Reform Act 1936 gave Bridgecorp a charge over all insurance money payable under a directors and officers (D&O) liability insurance policy, and that the charge had priority over any claim by the Bridgecorp directors to defence costs under the policy.

In practice this means that in the event of a significant civil claim in excess of a D&O policy's limit of liability, directors may be precluded from relying on the policy to pay their defence costs where the policy covers both the directors' defence costs and liability to third party claimants.

One way for directors to avoid this problem is for the company to take out a separate policy – such as a statutory liability policy or a separate D&O policy – that contains sufficient cover for defence costs but does not cover claims for damages and compensation. Insurance money under such a policy will not be subject to a charge in favour of a third party claimant under the Law Reform Act. Alternatively, directors should ensure that they have sufficient cover under their D&O policy for all likely claims and defence costs.