The High Court of New Zealand's recent decision in the Bridgecorp Case1 may have serious consequences for Australian directors seeking to rely on directors' and officers' insurance policies (D&O policies) to fund their defence costs in civil and criminal proceedings. The High Court found in the case that a statutory charge existed in favour of a potential claimant over monies payable to directors under a D&O policy. The decision has resulted in the insurer of the D&O policy being unable to advance monies to New Zealand directors for the directors' defence costs.
In light of the risk that the High Court's decision may be followed in Australian states and territories which have similar legislation, Australian directors and company officers should ensure that they have adequate cover for all likely claims and defence costs under their insurance policies.
The Bridgecorp Case concerns the Bridgecorp group of companies (the Bridgecorp Group), which borrowed money from the investing public to fund property developments in New Zealand, Australia and Fiji. The Bridgcorp Group collapsed and was placed in receivership in July 2007, owing investors nearly $500 million.
The directors of the Bridgecorp Group now face numerous civil and criminal claims, including prospective civil proceedings in respect of which orders for more than $450 million will be sought against them.
The Bridgecorp Group holds a D&O policy with QBE that provides cover for directors, including in respect of defence costs, up to a limit of $20 million. In general terms, the policy indemnifies the directors in respect of civil and criminal liability that they may incur as a result of their acts or omissions as directors. It also provides cover in respect of any costs that the directors may incur in defending civil and criminal proceedings seeking to establish such liability. The directors sought to use funds under their D&O policy to cover legal costs associated with the ongoing legal proceedings.
The key question in the case was whether a statutory charge existed in Bridgecorp's favour over all monies payable to the directors under the Bridgecorp D&O policy. It was submitted that the charge arose under section 9 of New Zealand's Law Reform Act 1936 (the Act.) It was argued that this section creates a charge in favour of a potential claimant over monies that may be payable under an insurance policy held by the person against whom the claim is made. On such an interpretation, section 9 operates to allow a third-party claimant to sue the insurer directly in the event the claimant is unable to pursue the insured (for example, if the insured is in liquidation.)
The wording of section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) mirrors that of section 9 of the Act. Thus the outcome of the Bridgecorp Case is of significant importance to the future operation of insurance policies in Australia in circumstances where defence costs are a critical part of the cover.
Decision Drawing upon both New Zealand and Australian case law, Lang J found that section 9 of the Act did give rise to a statutory charge in favour of Bridgecorp over monies payable under the D&O policy to the directors. Accordingly, QBE was prevented from advancing defence costs to the directors under the policy as the potential liability of the directors exceeded the available limit under the policy.
Justice Lang made the following key decisions in his judgment:
- The statutory charge created by section 9 is over "all insurance money" and no mechanism is provided under the Act for a release of funds to meet the insurer's other obligations to the insured under the policy where the claim exceeds the limit of cover. However, Justice Lang did indicate that this may not be the case if the limit of cover exceeds the claim.
- The fact that the amount of a claim has not been determined will not prevent the statutory charge from coming into existence.
- The charge can arise notwithstanding that the insurer has not yet accepted the claim, and/or where the insured has not established that the claim is covered by the insurance policy.
- The statutory charge has priority over all others affecting the insurance monies.
Although Lang J conceded that the High Court's determination produced some "unsatisfactory consequences" for directors and company officers, His Honour noted that the decision was in accordance with the purpose of section 9 of the Act, which is to prevent a depletion of funds available to a potential claimant.
The decision has been appealed.
Consequences for Australian directors and company officers Until the decision is considered by New South Wales Courts or overturned on appeal, great uncertainty will remain regarding the impact of the decision on Australian directors and company officers seeking to rely on existing insurance policies to fund their defence costs.
The potential impact of the decision is relevant not only to D&O Policies, but also to professional indemnity, management liability and financial institution policies where defence costs are a critical part of the cover. An insurance policy that covers both defence costs and liability to potential third party claimants may no longer operate to provide defence costs to directors and company officers in instances where the potential claim is in excess of the cover limit.
In light of the uncertainty brought by the decision, some Australian insurers and insurance brokers are currently looking at ways to revise the terms of their existing D&O polices to ensure that coverage for defence costs continue to be accessible by insured parties. Directors and company officers should seek advice to ensure that their insurance policies still provide adequate cover and confirm what, if any, steps their insurers are taking to address the uncertainties provided by the case.
1 Steigrad & Ors v BFSL 2007 Limited & Ors, High Court of New Zealand CIV-2011-404-611