In our November 2011 Banking and Commercial Law legal update we discussed the impact of the Steigrad v BFSL 2007 Ltd (Auckland High Court, 15 September 2011, Justice Lang) decision relating to directors and officers insurance.  In December 2012 the Court of Appeal reversed that High Court decision.

This case involved three former directors of the failed finance company Bridgecorp.  Bridgecorp had effected directors and officers insurance for the directors that covered both damages or compensation payments and defence costs within the same limit.  Bridgecorp brought a claim against the directors of more than $442m.  The directors sought to use the D&O insurance for the defence costs incurred in defending this claim.  However, Bridgecorp informed the insurer that it had a charge over the D&O insurance under section 9 of the Law Reform Act 1936.  As the value of the Bridgecorp claim was larger than the policy limit of $20m, Bridgecorp alleged no defence costs could be reimbursed as the entire policy limit was subject to the charge.

The directors applied to the High Court for a declaration that the charge did not prevent the insurer from reimbursing them for defence costs that they were legally entitled to.  The High Court did not accept this and held that the charge applied to prevent them being reimbursed for defence costs.

The Court of Appeal reversed the High Court decision for two reasons:

  • The right to be paid defence costs under the policy is an absolute right.  In this case, the policy clearly recognised that defence costs would be paid prior to any damages payment being required (as both damages and defence costs were payable as and when they were incurred).  The payment of defence costs may also prevent a payment for damages ever being required.  The charge could not apply over insurance that was lawfully payable to the directors for defence costs.
  • Section 9 was not intended to rewrite the contract between parties.  It is a mechanism to allow third parties to access funds directly that the insurer was obliged to pay the insured to meet the insured's liability to the third party.  If the charge applied, it may require the insurer to contribute its own money to pay for defence costs if it wished to defend the claim.  The charge is also subject to both the liability of the insured to the third party being established as well as the liability of the insurer to pay out under the claim to the insured being established.

The Court of Appeal held that the charge remains contingent and does not crystallise until the insurer has an obligation to pay to the insured the amount owing by the insured to the third party.

While this case returns the status of directors and officers insurance to what it was prior to the High Court decision, it is likely that the Court of Appeal's decision will be appealed to the Supreme Court.  Therefore, until any appeal is complete, it would be prudent for directors to ensure they have sufficient cover in place to continue.  As mentioned in our November legal update, options include:

  • Taking out a statutory liability policy (though note that these policies will only help cover defence costs in actions and investigations which involve breaches of statute and will not cover civil claims)
  • Increasing the level of cover on your D&O policy to ensure adequate coverage for all likely claims and defence costs, or
  • Taking out a separate defence costs insurance policy.