An earlier judgment that suggested that directors may be unable
to rely on Directors' and Officers' (D&O) liability
insurance to fund defence costs has been reversed. The overturned
decision had effectively prevented directors accessing a single
policy, intended to cover both defence costs and claims for
damages, where a civil claim (e.g. a class action by shareholders)
was held to have first priority over the insurance money.
In a judgment that sends encouraging news to directors, the New
Zealand Court of Appeal has stated that section 9 of the Law
Reform Act 1936 (New Zealand) (Act) cannot be interpreted to
give third party claimants priority over insurance money ahead of a
director's claim to defence costs under a D&O policy with a
Briefly, the judgment reverses the earlier decision on the
grounds that section 9 of the Act:
cannot be applied to avoid payment of defence costs, even where
the cover is combined with third party liability cover and subject
to a single limit of liability; and
takes effect subject to the terms of the contract of insurance
and instead of overriding them, and was never intended to interfere
with agreed contractual rights and obligations to provide cover and
reimbursement. 'The purpose of s 9 is not to rewrite the
bargain struck between the parties' (Steigrad v BFSL
The decisions are relevant to Australia because the New South
Wales Law Reform (Miscellaneous Provisions) Act 1946 was
modelled on the New Zealand legislation and contains a similar
provision. An insurance company operating out of NSW is subject to
the NSW legislation, and so how various courts interpret the clause
is particularly relevant.
A group of insurers has recently applied to the NSW Court of
Appeal to hand down guidance as to how the clause will be
interpreted, so the uncertainty created by the Bridgecorp decision
in Australia should be resolved soon.
We will continue to follow this matter and communicate any
developments as they happen. If you would like help reviewing your
policies in the meantime, or require any further information please
contact David Grace, Terry Batch or Andrew Cheetham.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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