A recent ruling in New Zealand has cast doubt on the extent to
which directors can rely on their Directors' and Officers'
(D&O) liability insurance cover to help fund defence costs. The
decision is relevant to all directors of companies who have a
single policy covering both defence costs and claims for
The case related to the collapse of the Bridgecorp companies in
July 2007, which left 14,300 investors out of pocket by $459
million. The New Zealand corporate regulator is currently pursuing
criminal charges against the company directors, and the directors,
having exhausted the sum of $2 million available to them under the
directors' statutory liability policy, sought to access
Bridgecorp's $20 million D&O policy to fund their defence
costs for a further $3 million. However the Bridgecorp receivers
told the D&O insurers that they intend to bring civil
proceedings against the directors, and that they have first claim
over the insurance monies because of a provision of the Law
Reform Act 1936 (New Zealand). The New Zealand High Court
agreed, and ruled that the directors could not access the insurance
The effect of the clause is that if a civil claim that exceeds
the policy limit has been, or will be made, then directors cannot
rely on the policy to pay defence costs even if the civil claim has
not yet been filed, or the chances of success are not clear. This
is because the charge gives the civil claim priority over the
director's entitlement to claim defence costs against the
This decision potentially affects many Australian company
directors because the New South Wales Law Reform (Miscellaneous
Provisions) Act 1946 was modelled on the New Zealand
legislation and contains a similar provision, with equivalent
legislation in Northern Territory and Australian Capital Territory.
There is no equivalent provision in Queensland and neither does
there appear to be in Victoria.
All company directors are potentially at risk because the law of
New South Wales may apply when interpreting the insurance policy.
This is because many insurance policies are issued by insurers
carrying on business in New South Wales, and the laws of that State
will usually apply.
While there may be argument in the future, in respect of a
company in liquidation that operated wholly in Queensland and the
liquidator of which is in Queensland, but where the law of New
South Wales applies to an insurer carrying on a business there, the
imposition of a charge may be difficult to avoid where the law is
designed to protect creditors from losing the benefit of the
insurance monies owed by an insurer carrying on business in that
Given the limiting of directors' rights under the D&O
policy, it may be considered imprudent by the directors of
companies insured with a New South Wales insurer to take the risk
that a court will not apply the charge provisions.
We strongly suggest that all companies and directors review
their current D&O policies to see if they are at risk.
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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