Should companies purchase a defence costs only policy, separate
to their D&O policy, to cover their directors and officers?
This has been a live issue, following the uncertainty caused by the
New Zealand case involving the Bridgecorp group of companies. The
success of the directors upon appeal (Steigrad v BFSL 2007 Limited
 NZCA 604) provides some comfort to directors. Nevertheless,
this will still be a difficult issue until an Australian court has
decided a similar case.
What was the Bridgecorp case all about?
Directors of companies in the Bridgecorp group faced civil and
criminal proceedings. They had cover under a D&O policy which
had a $20 million limit of indemnity. When cover under their
statutory liability policy had been exhausted, the directors turned
to their D&O insurer to cover their ongoing defence costs.
Two of the Bridgecorp companies (all of which were in
receivership or liquidation) made claims against the directors in
question. They sought damages of more than $450 million.
The D&O policy provided insurance both for defence
costs and for liability that the directors may
incur to pay compensation to third parties. The companies
recognised that the policy was a source of funds if they later
succeeded in their claims against the directors, and that the
insurer's payment of any defence costs now would reduce the
amount available in the future.
So what did the companies do? They tried to stop the directors
from accessing the D&O policy by asserting a charge on the
money payable under the D&O policy. They relied on a New
Zealand law which is very similar to section 6 of the Law Reform
(Miscellaneous Provisions) Act 1946 (NSW). This applies a statutory
charge on all insurance money that is or may become payable under a
contract of insurance which indemnifies a person against liability
to pay damages or compensation.
They argued that the charge applied to the whole of the
policy's limit of liability. The effect of asserting the charge
to the entire policy limit is simple: the directors would be out of
luck when it came to their defence costs. The New Zealand High
Court accepted this argument.
The New Zealand Court of Appeal finds in the
On 20 December 2012, the New Zealand Court of Appeal allowed
Steigrad's appeal. It said that the equivalent of section
does not by its terms apply to insurance monies payable in
respect of defence costs, even where such cover is combined with
third party liability cover and made subject to a single limit of
has limited effect and is not intended to rewrite or interfere
with contractual rights as to cover and reimbursement.
What does this mean for D&O insureds?
There has been some anxiety about the Bridgecorp decision across
the Tasman. This has led to a number of companies taking out a
separate defence costs only policy that will advance legal costs in
the event that a statutory charge has attached to the D&O
The arguments for purchasing a separate policy may partially
subside with the rejection of the Bridgecorp companies'
arguments by the New Zealand Court of Appeal. Of course, the fact
that the New Zealand High Court's decision has been overturned
is not decisive for an insured in Australia. It remains possible
that an Australian insurer may refuse to advance defence costs in
the face of a charge, pending an Australian court's decision on
this issue, out of fear that the insurer may have to pay out
An issue that was not canvassed in the Bridgecorp decisions was
the status of the directors under the policy. It is possible for a
company, and not its directors, to be the contracting insured when
taking out D&O cover. The directors, if they haven't been
involved in the purchase of the cover, are (in Australia) most
likely non-party beneficiaries of cover having rights under section
48 of the Insurance Contracts Act 1984 (Cth). If that is so, then
the directors could argue that the charge cannot be applied as
against a non-party beneficiary, such as a director, who did not
enter into the contract of insurance with the insurer.
We wait to see if an Australian case may be decided shortly on
this issue. For the moment, the New Zealand Court of Appeal has
taken some of the sting out of the Bridgecorp decision's
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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