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 Australian court.
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 Appeal").
Background
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.
Bridgecorp
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 costs.
Bridgecorp Appeal
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 incurred.
Australian equivalent
In Kirby v Centro Properties Limited (No 6) [2012] 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.