In brief - Third party claimants in NZ no longer have priority over access to insurance money
Today the New Zealand Court of Appeal delivered its judgment in Steigrad v BFSL 2007 Ltd & Ors COA CA674/2011 [20 December 2012]. The Court of Appeal has overturned the decision of Justice Lang in Steigrad v BFSL 2007 Ltd arising from the collapse of the Bridgecorp group of companies which we profiled in November 2011 in our article Directors unable to access D&O policy to pay defence costs.
The outcome is that the law in New Zealand regarding the assertion of charges over insurance money has shifted again. Third party claimants in that jurisdiction will now not be deemed to have a valid statutory charge, and therefore priority, over access to the insurance money, in respect of a director's claim to defence costs under a D&O policy with a single limit of indemnity.
Bridgecorp and Feltex appeals heard together in NZ Court of Appeal
The judgment concerns two separate appeals which were heard together by the New Zealand Court of Appeal.
The first of the appeals concerns the Bridgecorp decision and was brought by Mr Peter Steigrad, a director of Bridgecorp Ltd and related entities. Bridgecorp held two relevant insurance policies with QBE Insurance (International) Ltd, being a D&O insurance policy, and a statutory liability policy. He and two other directors were being sued for damages of $442 million for alleged breaches of their duties as directors of the Bridgecorp companies.
The second case arises out of the collapse of Feltex Carpets Ltd in 2004 and was brought by Chartis Insurance New Zealand Ltd in respect of a prospectus liability insurance policy it had issued to Feltex.
Charges asserted over insurance money payable under D&O policies
In both cases, charges pursuant to section 9 of the New Zealand Law Reform Act 1936 had been asserted over the insurance money payable under the policies referred to above. In the Bridgecorp decision, the charge was asserted by the receiver of Bridgecorp. In the Feltex case, which was not heard at first instance but transferred directly to the Court of Appeal for hearing together with the appeal of the Bridgecorp decision, the charge was asserted by an investor acting in a representative capacity for over 3,100 Feltex shareholders.
The Feltex case was commenced after, and solely in reliance on, the Bridgecorp decision. As there were no material differences between the QBE policies and the Chartis policy and the judgment in respect of the appeal of the Bridgecorp decision would dictate the same result in both cases, the cases were heard together.
First instance NZ High Court decision prevents directors from accessing insurance money to pay defence costs
Section 9 of the NZ Law Reform Act operates to create a charge in certain circumstances over any insurance money that is or may become payable in respect of an insured's liability to pay damages or compensation.
In handing down the Bridgecorp decision, the New Zealand High Court held that a charge created by section 9(1) of the NZ Law Reform Act applied to the whole of the amount available under a D&O liability insurance policy issued by QBE to Bridgecorp, such that the charge prevented the directors of Bridgecorp from having access to the insurance money to meet their defence costs.
The reasoning of the High Court of New Zealand was that, as the insurance money might become payable to Bridgecorp as a result of the litigation, Bridgecorp had a charge over that entire sum, and that the directors could not access that sum to pay their defence costs.
Insurer's liability to reimburse insured party for defence costs
The essential question raised by the appeals was the interpretation of section 9 of the NZ Law Reform Act.
In particular, the Court of Appeal focused on whether the phrase "all insurance money that is or may become payable in respect of that liability" found in section 9(1) includes insurance money that is or may become payable on account of an insurer’s liability to reimburse an insured party for defence costs incurred in defending a claim.
The Court of Appeal held that section 9 of the NZ Law Reform Act does not prevent an insurer from meeting its obligation under a policy to reimburse insureds for defence costs for two key reasons:
- section 9 of the NZ Law Reform Act does not by its terms apply to insurance monies payable in respect of defence costs, even where such cover is combined with third party liability cover and made subject to a single limit of liability; and
- section 9 of the NZ Law Reform Act has limited effect and is not intended to rewrite or interfere with contractual rights as to cover and reimbursement negotiated between the insurer and the insured.
Court of Appeal rules that insurer's only crystallised liability is to pay directors' defence costs
In relation to the issue of defence costs, the Court of Appeal decided that:
- the object and purpose of section 9 of the NZ Law Reform Act is to provide a charge over money payable by an insurer to indemnify an insured party against his liability on a claim by a third party. It does not provide a charge or security over insurance money that is not payable in settlement or discharge of that liability [at 29];
- there is therefore a distinction between insurance money lawfully payable by an insurer to a director to reimburse his existing liability to pay defence costs incurred with the insurer's consent or otherwise, and a contingent liability for damages or compensation [at 26];and
- in the case of Bridgecorp, the statutory charge created by section 9 of the NZ Law Reform Act was found to be contingent. The Court of Appeal held that the charge would not crystallise unless and until QBE became legally liable to meet any damages or compensation payable by Mr Steigrad to Bridgecorp pursuant to, for example, judicial decision or settlement. That requires, first, that Mr Steigrad’s liability to Bridgecorp be established; and second, that QBE’s liability to Mr Steigrad under the policy be established. In the meantime, the amount, if any, of the insurer’s contingent liability is unknown and the insurer's only crystallised liability is to pay Mr Steigrad’s defence costs [at 45].
Purpose of section 9 is not to rewrite the bargain between the parties
In relation to the matter of the insured's contractual rights, the Court of Appeal held that:
- the statutory provision is limited to granting a charge in favour of a third party over "all insurance money" that an insurer is liable to pay in discharge of the insured’s liability to that third party. Its terms cannot operate to interfere with or suspend the performance of mutual contractual rights and obligations relating to another liability [at 57]; and
- the purpose of section 9 of the NZ Law Reform Act is not to rewrite the bargain struck between the parties. It is largely procedural in nature, and is a mechanism whereby a third party claimant can access directly funds which an insurer is liable to pay its insured to meet the insured’s liability to that third party [at 38].
Final outcome still uncertain in both Australia and New Zealand
Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW Act) is the New South Wales equivalent provision to section 9 of the NZ Law Reform Act (with equivalent legislation in the Northern Territory and the Australian Capital Territory). To date, the Bridgecorp decision has yet to be considered by an Australian court, such that there is presently uncertainty as to the proper interpretation and application of section 6 of the NSW Act.
Despite this, it seems likely that the judgment of the New Zealand Court of Appeal may be persuasive to an Australian court when considering the application of section 6 of the NSW Act. However, the area of law remains far from settled here. As it is still possible that the decision of the Court of Appeal will be appealed to the Supreme Court of New Zealand, it is also subject to further change in New Zealand.
In the absence of certainty on the point, and as explained in detail in our initial report on this case referred to above, both insureds and insurers should take extra care: the former when negotiating policies and choosing their level of indemnity and the latter when paying amounts as defence costs in circumstances where a charge may be threatened or asserted. Developments in this area should continue to be closely monitored by all.