In our March 2013 banking and commercial law legal update we summarised the Court of Appeal's decision in Steigrad v BFSL 2007 Limited [2012] NZCA 604 (Steigrad) regarding directors' and officers' insurance and the effect of section 9 of the Law Reform Act 1936. The matter has been appealed and is expected to be heard by the Supreme Court in October 2013.

In the meantime, the New South Wales Court of Appeal has recently taken an opportunity to consider the effect of the Australian equivalent to section 9 in Chubb Insurance of Australia Limited v Moore [2013] NSWCA 212 (Chubb).

In our view, the NSW Court of Appeal's reasoning in Chubb is consistent with that of the New Zealand Court of Appeal:

  • A charge does not extend to insurance monies payable for defence costs - a right to be indemnified under the insurance policy can only attach once the liability to pay damages or compensation has been determined by judgment, award or settlement. Until that time there is no entitlement for the third party claimant to be paid damages or compensation out of those insurance monies. The legislation was not intended to alter the contractual rights between the insurer and insured under the relevant contract.
  • A claim does not prevent insurance monies being paid to meet other legitimate claims of the insured under the insurance policy, such as the insured's defence costs, which may result in the limit of that policy exhausted. Where the limit under the insurance contract has been reached, and the insured is solvent and is found liable, the claimant can enforce its judgment against the insured, and the insured will be required to meet that judgment from its own funds, notwithstanding that it receives no indemnity from the insurer. The Court found that there was no reason in principle why a claimant should not be exposed to the same risk that faces the insured and that a claimant should not be in a better position than the insured.