Don't panic, your Directors and Officers
("D&O") policy will still pay
defence costs despite the recent scare in Bridgecorp.
A recent decision by the Auckland High Court, Steigrad &
Ors v BFSL 2007 Limited & Ors (HC Auckland,
CIV-2011-404-611, 15 September 2011)
("Bridgecorp"), raised concerns by
preventing directors from accessing their D&O policy to fund
defence costs where a claimant enforced a statutory charge under
Section 9 of the Law Reform Act 1936 (NZ) against the
proceeds of the policy.
Similar provisions exist in several Australian jurisdictions,
the application of which has not yet been considered by an
It came as a relief on both sides of the Tasman when the Court
of Appeal overturned the ruling in Steigrad v BFSL 2007 Ltd
& Ors COA CA674/2011 [20 December 2012] ("Bridgecorp
The Bridgecorp Group collapsed in July 2007, resulting in
criminal and civil claims against its directors. There was a
corporate D&O policy for $20 million and a separate Statutory
Liability policy for $2 million, both with QBE.
QBE and the directors agreed to first use the Statutory
Liability policy to pay various defence costs, but this was
exhausted by August 2011.
In June 2009, the Bridgecorp Group asserted a Section 9 charge
over monies payable under the D&O policy for amounts they
intended to claim from the directors.
The purpose of Section 9 is to provide redress against the
insurer where proceedings against the insured cannot proceed. Where
a policy indemnifies an insured against liability for damages or
compensation, a charge is created over all insurance monies payable
under that policy. A claimant can enforce the charge under Section
9 by action directly against the insurer.
Justice Lang found even though the Section 9 charge remained
conditional on the establishment of liability and a determination
that the D&O policy would respond to the liability, QBE was
nevertheless required to keep the D&O policy intact for the
benefit of civil claimants.
Accordingly, Justice Lang gave orders confirming a Section 9
charge, and preventing access to the D&O policy to fund defence
The Court of Appeal overturned the previous decision, and held
the directors were not prevented from having access to the D&O
policy to fund their defence costs for two separate reasons:
Section 9 does not apply to insurance funds payable for defence
costs, even if cover for defence costs and third party liability
are subject to a single, combined, limit of liability; and
Section 9 is largely procedural and cannot operate to interfere
with the contractual relationship between an insurer and insured
for reimbursement of defence costs as and when they are
In Kirby v Centro Properties Limited (No 6)  FCA
650 ("Centro Properties"), the D&O
insurer asked the NSW Supreme Court for a ruling on whether the
plaintiffs had a charge over the D&O policy under Section 6 of
the Law Reform (Miscellaneous Provisions) Act 1946 (NSW),
which would take priority over the payment of defence costs.
Section 6 of the NSW Act is in similar terms as Section 9,
however Centro Properties settled on 19 June 2012 for $200 million
before the issue could be decided.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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