On 23 December 2013, the Supreme Court of New Zealand, (that country’s highest court) delivered judgment in the much anticipatedBridgecorp12 appeal.
The issues in dispute arose in the context of section 9 of the Law Reform Act (1936) (NZ), which imposes a statutory charge on the proceeds of a policy of insurance. The issues involved the following questions:
- whether a section 9 charge secures whatever is eventually held to be the full amount of the insured’s liability to the third party claimant (up to any policy limit), with no payments under the policy able to be made that would deplete the insurance money available to meet the third party claim if it is established; or
- whether the charge secures only the insurance money that remains at the time of judgment on, or settlement of, the third party claim against the insured, allowing in the meantime the payment of other sums that fall due for payment under the policy, such as defence costs, even if that depletes the sum available to meet the third party claim.
The liquidators of Bridgecorp argued that pursuant to section 9, the charge was triggered at the time of the collapse of the Bridgecorp group of companies and operated from the outset to secure under the policy whatever was eventually held to be the full amount of the insured’s liability (subject to the policy limit). Further, it was contended that no payments in respect of the directors’ defence costs could be made under the policy that would in effect deplete the money available to meet the third party claims. This was the position accepted at first instance by the New Zealand High Court.
On appeal, the Court of Appeal overturned the High Court’s decision and accepted the directors' argument that the section 9 charge operated to secure the insurance money that remained only at the time of the judgment or settlement of the third party claim against the insured, allowing in the meantime for the advancement of defence costs. It was accepted that section 9 was not designed to interfere with the contract between the directors and their insurers and that until liability was established, payments for defences costs could be made as they fell due under the policy.
The Supreme Court judgment
On appeal, the Supreme Court, by a 3:2 majority effectively reinstated the decision at first instance with the Court finding:
- that the statutory charge secured the full amount of the eventual liability of the claim and the charge arose immediately on the occurrence of the event giving rise to the claim. Thus it was held that the charge was created at the time Bridgecorp collapsed, as opposed to the later time when the directors’ liability and the quantum of the claim crystallised;
- where there is insufficient insurance cover to meet both third party claims and directors’ defence costs, the insurer will be at risk of breaching the statutory charge pursuant to section 9 if the insurer makes payments that in effect reduce the overall funds available under the policy. Effectively, the Court suggested that the payment of defence costs to directors is at the risk of the insurer in that the statutory charge overrides the contractual obligation with regard to the payment of defence costs
The Supreme Court did not however go as far to say that insurers could refuse to advance defence costs payments, but rather suggested that these payments would potentially be outside of the policy limit.
The position taken by the New Zealand Supreme Court means that in the absence of a specific insurance product providing cover solely in respect of directors’ defence costs in order to satisfy the section 9 charge, the payment of defence costs by New Zealand insurers may only be on an ’insurer’s own risk’ basis or treated as outside of policy limits.
In terms of the implications of the Bridgecorp decision for Australian insurers, the decision currently stands at odds with the New South Wales Court of Appeal decision in Chubb Insurance Company of Australia Limited v Moore13 in which the Court was similarly asked to consider whether a statutory charge could prevent an insurer from advancing defence costs to an insured that would erode the policy limit.