Australia: The Bridgecorp Decision: A Bridge too Far?

Last Updated: 29 February 2012
Article by Crossley Gates

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.

SOLUTION

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:

"[7] 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").

...

[16] "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.

Separate contracts

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.

CONCLUSION

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.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions