The recent New Zealand High Court decision ofSteigrad & Ors v BFSL 2007 Limited & Ors, High Court of New Zealand CIV-2011-404-611 ("Steigrad Decision") is causing headaches for Australian and New Zealand directors, their insurers and brokers. The decision may have far-reaching implications on the ability of insurers to advance defence costs in certain circumstances.
The Steigrad Decision involves the New Zealand equivalent of section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) ("Section 6"). The Australian Capital Territory and Northern Territory have similar sections - section 206 Civil Wrongs Act 2002 (ACT) and section 26 Law Reform (Miscellaneous Provisions) Act (NT).
Section 6 provides that a statutory charge attaches to insurance monies payable in respect of a claim, in practice allowing the third-party claimant to sue the insurer directly in the event the claimant is unable to pursue the insured (eg if the insured is in liquidation).
If the claimant's potential liability significantly exceeds the available limit under the relevant directors and officers insurance policy ("D&O Policy"), the New Zealand High Court, at first instance, has found that a statutory charge exists in favour of potential claimants over monies payable under the D&O Policy. As a result, there were no available moneys under that policy from which to advance defence costs to the directors.
The directors of Bridgecorp, a group of companies in either receivership or liquidation that borrowed public monies to fund property developments, face numerous claims in New Zealand exceeding $450 million.
Bridgecorp held a D&O Policy with QBE that provided cover, including for defence costs, up to a limit of $20 million. The directors also held a statutory liability policy with QBE ("SL Policy"), which provided cover for defence costs up to $2 million.
The directors exhausted the SL Policy while defending criminal proceedings and sought to use funds under the D&O Policy for further legal costs. Under the NZ equivalent of Section 6, Bridgecorp asserted a charge over any monies payable under the D&O Policy in respect of an intended civil claim against directors for more than $450 million that had not yet been commenced.
At issue was whether a charge existed pursuant to the New Zealand equivalent of Section 6 and if it prevented the directors from accessing defence costs under their D&O Policy with QBE.
Lang J found that a charge existed in favour of the potential claimants over monies payable under the D&O Policy. QBE was prevented from advancing defence costs to the director under the D&O Policy because the potential liability exceeded the available limit under that policy.
His Honour looked at Australian and New Zealand cases to determine the purpose of the relevant section and held it was a mechanism designed to give claimants direct access to insurance monies in appropriate circumstances by preventing an insured from:
- receiving and disbursing the proceeds of an insurance claim for purposes other than satisfying the claim that proceeds were paid out for; and
- "entering into a corrupt bargain with the insurer" that would frustrate a claimant's ability to gain access to monies payable under a policy.
In finding the existence of a charge, his Honour held that under the relevant section, the charge descended upon "the date of the event giving rise to the claim".
His Honour relied upon three key factors in finding that the charge prevented payment of defence costs:
- The charge is over "all insurance money" and no mechanism is provided for the release of funds to meet the insurer's other obligations under the policy where the claim exceeds the cover amount (though His Honour indicated this may differ if the cover amount exceeds the claim).
- Although this is a harsh result for the directors, it is in accordance with the purpose of the section, which is to prevent the depletion of funds available to a potential claimant.
- The statutory charge has priority over all others affecting the insurance money and allowing the insured access to funds would put them in a better position than other secured creditors.
This case was the first time a court has considered an equivalent of Section 6 in the context of advancement of defence costs under a D&O policy. It is being appealed and will no doubt be closely followed.
However, it sets a disturbing precedent. The potential impact of this decision is relevant not only to D&O Policies, but also to other policies where defence costs are a critical part of cover, such as professional indemnity, management liability and financial institution policies.
If the NZ Court of Appeal upholds Lang J's decision, it is likely that courts in Australia will interpret equivalent sections (such as Section 6) consistently.
The insurance market is urgently looking at ways to protect defence costs from charges that may otherwise be available under Section 6. We anticipate such ways may include costs in addition limits, separate defence costs cover, or drop-down mechanisms.
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