The recent Auckland High Court decision of Steigrad and others v BCFL Limited and others CIV (Bridgecorp decision) has shone the spotlight on the Directors and Officers (D&O) liability policy in both legal and insurance circles. This article considers what this policy is meant to cover, what the legislation intended and the way forward for policies to overcome their deficiencies, as demonstrated by the Bridgecorp decision. The New Zealand decision is of great significance because the charge on the policy that brought about the result is available in New South Wales, the Australian Capital Territory and the Northern Territory.
EFFECT OF SECTION 9 OF THE LAW REFORM ACT
Section 9 of New Zealand's Law Reform Act 1936 (and its counterparts in NSW, the ACT and the NT) is typically relied upon in disputes where the defendant is bankrupt or in liquidation, but held applicable public liability insurance at the relevant time.
Section 9 applies to "... a contract of insurance (that indemnifies) against liability to pay any damages or compensation". It creates a charge over that policy in favour of the claimant at the date of the alleged wrongdoing by the insured under the policy. This is despite the fact that, at this point in time, neither the liability nor the amount of it has been determined.
Section 9 goes on to say that the charge attaches to all insurance money payable, "...in respect of (the alleged) liability". The meaning of the words "in respect of" is wide. Clearly damages are payable in respect of the liability. The court in the Bridgecorp decision found defence costs are also caught by those words. This must be so. But for the alleged liability, there would be no defence costs.
A charge can be asserted over any liability policy. Therefore this issue is not limited to D&O and professional indemnity policies. In any claim where a plaintiff suspects inadequate insurance cover, a charge could be asserted over the entire policy limit, leaving an insured without access to defence costs.
The mischief section 9 is addressing is the dilution of the benefit of the liable party's liability policy amongst other claimants later in time or amongst the insured's creditors. It is clearly not intended to give those people better rights under the policy than the insured had.
The reasoning in the Bridgecorp decision was based on the structure of the particular D&O policy in question. There are some details in the judgment about this. They are as follows:
" The Bridgecorp companies have held a directors and officers insurance policy (the "D & O" policy) with QBE, the third defendant, since 1996. The current limit of indemnity under the D & O policy is $20 million. In broad terms, the policy indemnifies the directors in respect of any civil and criminal liability that they might incur as a result of their acts or omissions as directors. It also provides cover in respect of any costs that they might incur in defending civil and criminal proceedings seeking to establish such liability ("defence costs").
 "Loss" is defined in cl 2.0 of the policy as: All sums that the Insured Person becomes legally liable to pay on account of all claims made against the Insured Person for any Wrongful Act to which this insurance applies, including but not limited to Defence Costs." (Emphasis added)
It appears from this that the full NZ$20 million sum insured was potentially available for all "loss" and was not divided, in any way, between the legal liability part of the cover and the defence costs part of the cover. By implication, this meant the section 9 charge could attach to the whole $20 million potentially available for legal liability. A by-product of this was that nothing was left for defence costs where that charge exceeded the $20 million sum insured.
Some insurers are already introducing enhancements to their D&O and professional indemnity policies to ensure their insureds do not lose their entitlement to defence costs. There are at least two solutions to this shortcoming in the cover.
One solution is to divide the liability cover and the defence costs cover into two or more separate, but interrelated, contracts. The cover under the defence costs cover would be triggered by a covered claim under the liability cover. Legal costs for investigations and enquiries may be well another contract, such cover not needing a claim to trigger it.
This will be effective because the section 9 charge can only attach to a contract of insurance that indemnifies against liability to pay damages and compensation. The defence costs policy only indemnifies the insured's defence costs. Therefore, section 9 cannot apply to it and it remains outside a section 9 charge.
Sums insured in separate "towers" of cover
A second solution is to structure the policy differently so that the entire sum insured for the policy is not potentially available to indemnify against liability to pay damages or compensation. Rather, the sum insured is split into two "towers" of cover. One tower is for liability cover only and the other is for defence costs cover only. It appears the policy in the Bridgecorp decision was not structured this way. This is a critical difference.
The limit fixed between the insurer and the insured for liability will be the liability sum insured tower only. Therefore, reading these two sections together leads to a strong argument that the charge should also be limited to the same amount. Otherwise the insurer becomes liable under the policy (via the charge) for a sum greater than that fixed by the contract, and greater than the insured was ever entitled to. This is clearly contrary to the legislation.
Where directors or employees are sued for amounts in excess of the sum insured under their D&O policy, the Bridgecorp decision has revealed a potential deficiency in the cover.
However, this deficiency can be overcome with reasonable ease by structuring the two key covers under the policy in such a way that the section 9 charge can only apply to part of the sum insured available under the policy and not all of it.
This preserves some defence costs cover under the policy for the directors and employees, regardless of the amount for which they are being held liable.
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