On 15 September 2011, the extent of cover available for defence
costs under a directors and officers (D&O) policy was thrown
into doubt by the New Zealand High Court in Steigrad & Ors
v BFSL2007 Ltd & Ors HC Auckland CIV-2011-404-611. The
High Court relied on section 9 of the Law Reform Act 1936
(NZ) in deciding that the former Bridgecorp directors could not
rely on their D&O policy to meet the cost of defending civil
and criminal claims against them. Several Australian states have
In the High Court, Lang J held that the charge created by
section 9 applies to the entire sum insured available for both
liability and defence costs cover. Thus, where the potential
liability the insured is facing to a claimant exceeds the sum
insured, the charge exhausts the sum insured and nothing is left to
pay defence costs in the meantime.
Just before Christmas 2012, the New Zealand Court of Appeal
overturned this decision due to the unfair effect it has on the
insured. It found it to be irrelevant that the payment of the
defence costs depletes the funds available to meet a claimant's
claim, should it succeed. This is a necessary consequence of the
policy's structure and is consistent with an insurer wishing to
avoid its contingent liability under the policy by incurring
defence costs first to avoid the insured's alleged liability to
In the D&O policy before the court, there was a single
aggregated sum insured, from which defence costs and third-party
liability were to be met. The Court of Appeal was of the view that
if these two insurer obligations were in two separate policies then
a charge would not apply to the defence costs policy. The fact of
combining the two distinct liabilities into one policy and having a
single sum insured does not change the principle that section 9
does not apply to the defence costs cover. Section 9 does not
operate to provide a charge over insurance money that will not be
payable in settlement or discharge of that liability.
The Court of Appeal also held that section 9 cannot interfere
with a contractual arrangement between an insurer and the insured
as section 9 is merely a procedural mechanism enabling a claimant
to directly access funds payable by an insurer under a policy to
meet the insured's liability to the claimant. The section must
take effect subject to the terms of the contract, meaning that the
charge is subject to the limit of indemnity for legal liability to
claimants. The amount of funds available for indemnity must be
determined after the insurer's liability to meet defence costs
under the policy is determined. If the insured is deprived of the
right to reimbursement of defence costs under the policy, then this
cover would be rendered useless in practice.
This reversal of the High Court's decision will come as a
relief to some. We wait with interest to see if the claimants will
seek leave to appeal this decision in New Zealand's highest
court, the Supreme Court.
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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