14 Jan 2013

Bridgecorp appeal: The latest on defence costs under a D&O policy and the application of a statutory charge

Should companies purchase a defence costs only policy, separate to their D&O policy, to cover their directors and officers? This has been a live issue, following the uncertainty caused by the New Zealand case involving the Bridgecorp group of companies. The success of the directors upon appeal (Steigrad v BFSL 2007 Limited [2012] NZCA 604) provides some comfort to directors. Nevertheless, this will still be a difficult issue until an Australian court has decided a similar case.

What was the Bridgecorp case all about?

Directors of companies in the Bridgecorp group faced civil and criminal proceedings. They had cover under a D&O policy which had a $20 million limit of indemnity. When cover under their statutory liability policy had been exhausted, the directors turned to their D&O insurer to cover their ongoing defence costs.

Two of the Bridgecorp companies (all of which were in receivership or liquidation) made claims against the directors in question. They sought damages of more than $450 million.

The D&O policy provided insurance both for defence costs and for liability that the directors may incur to pay compensation to third parties. The companies recognised that the policy was a source of funds if they later succeeded in their claims against the directors, and that the insurer's payment of any defence costs now would reduce the amount available in the future.

So what did the companies do? They tried to stop the directors from accessing the D&O policy by asserting a charge on the money payable under the D&O policy. They relied on a New Zealand law which is very similar to section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). This applies a statutory charge on all insurance money that is or may become payable under a contract of insurance which indemnifies a person against liability to pay damages or compensation.

They argued that the charge applied to the whole of the policy's limit of liability. The effect of asserting the charge to the entire policy limit is simple: the directors would be out of luck when it came to their defence costs. The New Zealand High Court accepted this argument.

The New Zealand Court of Appeal finds in the directors' favour

On 20 December 2012, the New Zealand Court of Appeal allowed Steigrad's appeal. It said that the equivalent of section 6:

  • 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
  • has limited effect and is not intended to rewrite or interfere with contractual rights as to cover and reimbursement.

What does this mean for D&O insureds?

There has been some anxiety about the Bridgecorp decision across the Tasman. This has led to a number of companies taking out a separate defence costs only policy that will advance legal costs in the event that a statutory charge has attached to the D&O policy.

The arguments for purchasing a separate policy may partially subside with the rejection of the Bridgecorp companies' arguments by the New Zealand Court of Appeal. Of course, the fact that the New Zealand High Court's decision has been overturned is not decisive for an insured in Australia. It remains possible that an Australian insurer may refuse to advance defence costs in the face of a charge, pending an Australian court's decision on this issue, out of fear that the insurer may have to pay out twice.

An issue that was not canvassed in the Bridgecorp decisions was the status of the directors under the policy. It is possible for a company, and not its directors, to be the contracting insured when taking out D&O cover. The directors, if they haven't been involved in the purchase of the cover, are (in Australia) most likely non-party beneficiaries of cover having rights under section 48 of the Insurance Contracts Act 1984 (Cth). If that is so, then the directors could argue that the charge cannot be applied as against a non-party beneficiary, such as a director, who did not enter into the contract of insurance with the insurer.

We wait to see if an Australian case may be decided shortly on this issue. For the moment, the New Zealand Court of Appeal has taken some of the sting out of the Bridgecorp decision's tail.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.