21 January 2014
Practice Group(s):
Insurance Coverage
New Zealand's Highest Court Makes Life Difficult
for D&O Policyholders (and Their Insurers)
By Mark Dobbie and Christien Corns
The Supreme Court of New Zealand (Court) last month handed down the latest in a
series of decisions, both in New Zealand and Australia, relating to the enforceability of
'statutory charges' over insurance monies – and it is not good news for Directors and
Officers (D&O) insurance policyholders or their insurers.
Background
Legislation in New Zealand and some states of Australia (New South Wales (NSW), the
Australian Capital Territory (ACT) and the Northern Territory) provides for the creation of
a statutory charge over insurance monies in favour of third party claimants.
The purpose of the legislation is to enable plaintiffs to recover insurance monies directly
from the insurer of an insured defendant, where that plaintiff's claim is successful. The
legislation aims to prevent unfairness to plaintiffs who would otherwise be unable to
recover damages against insolvent, but insured, defendants.
The legislation has given rise to significant litigation both in New Zealand and NSW,
specifically in relation to D&O policies, which provide cover for both third party liability
and defence costs. The key issue is whether the statutory charge operates to stop D&O
insurers first advancing payments for directors and officers' defence costs in
circumstances where the same policy also provides cover for payments of compensation
to third party claimants.
Bridgecorp
Following the 2007 collapse of the Bridgecorp finance group in New Zealand, the
receivers of Bridgecorp commenced civil proceedings against three of its directors,
including a Mr Steigrad, seeking more than AUD300 million in damages on behalf of out
of pocket investors. Bridgecorp held a AUD20 million D&O policy, which indemnified its
directors for liability incurred to third parties as a consequence of their actions as
directors. The same policy also provided cover for the directors' defence costs.
In BFSL 2007 Ltd & Ors [in liq] v Steigrad [2013] NZSC 156, the Court (the country's
highest court) held that Bridgecorp was entitled to a charge over all of the AUD20 million
D&O policy, to the exclusion of the directors' defence costs, finding that, "the statutory
charge … arises on the happening of the event giving rise to the claim and secures the
full amount of the liability to a third party claimant as eventually established through
judgment on, or settlement of, the claim". As a result, the directors' defence costs can not
be paid out of the D&O policy before any insurance proceeds, available to any successful
third parties, are paid out of the same policy.
The Court criticised the insurer, QBE and the directors, for not having taken proper
account of the statutory charge legislation when drawing the policy, and left open the
question of whether the insurer should be liable to pay the directors' defence costs in
addition to the full amount of the statutory charge.
New Zealand's Highest Court Makes Life Difficult for D&O Policyholders
(and Their Insurers)
Great Southern
The New Zealand position is to be contrasted with that taken by the NSW Court of
Appeal in July 2013, in Chubb Insurance Company of Australia Ltd v Moore [2013]
NSWCA 212. That case arose out of the collapse of the Great Southern Group (GSG),
which resulted in class actions in both Victoria and Western Australia against former
directors and officers of GSG.
The NSW Court of Appeal was asked to consider whether the NSW legislation (similar to
that in New Zealand) prevented the D&O insurers from advancing defence costs to the
insured directors, in circumstances where the relevant policy also provided cover for third
party liability.
The NSW Court of Appeal held that the NSW legislation only applied to proceedings
commenced in that state, and was, therefore, of no relevance to the GSG litigation,
effectively clearing the D&O insurers to advance defence costs to the defendant directors
and officers. The Court went on to say that, had it been required to make a finding, it
would have held that the statutory charge would not attach to defence costs, and the
legislation was not intended to interfere with the contractual rights of the parties to the
D&O policy.
Without a final definitive ruling on the subject in Australia, some uncertainty remains,
particularly with a special leave application in the GSG litigation pending in the High
Court of Australia. In the meantime, it makes a great deal of sense for directors and other
insureds, particularly in those jurisdictions where statutory charges apply, to purchase
separate polices covering third party liability on the one hand, and defence costs on the
other.
Authors:
Mark Dobbie
mark.dobbie@klgates.com
+61.3.9205.2004
Christien Corns
christien.corns@klgates.com
+61.3.9640.4248
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