The High Court last week released a decision which may be a cause for concern for any directors who are insured under a D&O policy. The decision has wide-reaching ramifications for any directors who have policies where defence costs and claims for damages are covered by the same policy.  

Bridgecorp Directors Denied Access to Insurance Funds

The directors of Bridgecorp sought access to the $20m D&O policy they had taken out in order to fund the defence of the criminal charges against them for the upcoming trial in October. However, the receivers for Bridgecorp had signalled that they intended to make a claim against the directors in relation to the collapse of the company. That claim was potentially in excess of $450m.

The receivers went to the D&O insurers, QBE, and said they had first claim over the insurance monies by virtue of a provision of the Law Reform Act. The High Court agreed.

As the potential claim by the receivers is more than the total coverage under the D&O policy, the insurers will now ring fence that money and not pay the directors' defence costs to ensure that there is enough money to pay the receivers, if they formalise their claim and if they succeed.

The practical effect of this decision is to prevent the Bridgecorp directors having access to the D&O policy to fund their immediate defence costs. This is against the background of one of the directors (Mr Petricevic) having recently been denied legal aid. The directors will need to meet their defence costs from whatever personal means they may have. The Judge recognised that this was an unwelcome decision for the directors who were operating on the assumption that they had D&O coverage. The Judge said:

"I am conscious that it produces some unsatisfactory consequences. In particular, it means that the charge [against the policy] prevents the directors from being able to resort to the D&O policy to meet their defence costs even though [the receivers] have not yet filed a claim against them and may not do so for some considerable time. That result may seem unfair given the fact that the Bridgecorp companies took the policy out at least in part for that specific purpose."

What Does this Mean for Other Directors?

In view of this decision directors should take advice on the adequacy of their insurance policies and in particular whether coverage for defence costs and claims should be put in separate policies. Part of the problem for the Bridgecorp directors was that they had a separate statutory liability policy (which could not be attacked by the receivers) but it was only for $2m and the defence costs exceeded this amount. It would also be sensible for directors to review whether the amount of D&O coverage they have is adequate to cover the types of claims they could be exposed to in undertaking their duties.

To see the full case click here.