Australia: The trans-Tasman gulf on advancing defence costs under a D&O policy widens

Last Updated: 11 February 2014
Article by David Gerber

Key Points:

New Zealand and NSW differ on whether an insurer can advance defence costs while on notice of a statutory charge before liability to the third party is established.

If a directors' and officers' liability policy obliges an insurer to advance defence costs to a director or officer, is that sum also subject to a charge in favour of the third party who has a claim against the directors and officers?

This has been a live question in recent years, and has led to some insurers withholding defence costs needed by directors and officers. In the latest development, the Supreme Court of New Zealand has in effect, concluded that a statutory charge over insurance money under section 9(1) of the New Zealand Law Reform Act 1936 (NZLRA) secures the amount available to cover liability to a third party, so that the insurance cannot be diminished by an advance of defence costs made to the insured after the charge came into existence (in BFSL and Bridgecorp v Steigrad, Houghton v AIG [2013] NZSC 156).

The court declined to form a view on whether this means an insurer would be entitled to refuse to pay defence costs where there was a risk that the payment of such costs, together with any outstanding third party claims of which the insurer has notice, may exceed the relevant policy limit. However, it indicated that an insurer "may be entitled to be cautious" about meeting such claims for defence costs.

It acknowledged that the risk that payments would exceed the policy limit was to be borne by the insurer, noting that the insurer and insured in question had made a poor bargain by overlooking the effect of the statutory charge.

New Zealand vs Australia

In New South Wales (and certain other Australian jurisdictions) there is legislation in similar terms to the NZLRA. The NSW Court of Appeal last year effectively concluded that an insurer could advance defence costs while on notice of a charge under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) without fear of ultimately becoming liable for amounts in excess of the policy limit. The position in New Zealand now appears to be different to the position in New South Wales (and, potentially, those Australian jurisdictions with an equivalent statutory provision).

A key point of difference between the judgments of the Supreme Court of New Zealand and the NSW Court of Appeal's decision in Chubb Insurance Company of Australia Limited v Moore [2013] NSWCA 212 lies in its answer to the question: must a liability of the insured to a third party be established (eg. through the entry of a judgment or entry into a settlement) for the statutory charge to take effect? If it is, an insurer would only be prevented from making payments for defence costs after liability is established.

The NSW Court of Appeal took the view that, until the insured becomes liable to pay damages or compensation, there is nothing to which the statutory charge can attach or on to which it can descend. Accordingly, until such time as an actual liability to a third party has been established, the charge does not relevantly take effect and the insurer was able to pay defence costs incurred by the insured as it had a contractual obligation to so.

On the other hand, the judges of the Supreme Court of New Zealand have decided that there is nothing in the wording of section 9 of the NZLRA to specify that the charge crystallises on judgment or settlement and that the charge is not analogous to a floating charge. That being the case, it is irrelevant that the insured may be obliged to pay defence costs for which it has insurance cover, before liability is established on third party claims for damages or compensation.

Where does this leave us?

In New Zealand, persons who may have claims against parties who are insured will be pleased to know that any entitlement their defendants may have to cover under a liability policy should, by reason of a charge arising under section 9 of the NZLRA, not be diminished by an insurer subsequently advancing defence costs under the same policy. However, an insurer who is on notice of a charge under section 9 of the NZLRA is now faced with uncertainty as to whether it will become liable to make payments in excess of policy limits either by:

  • performing its contractual promise to advance defence costs and subsequently becoming liable to a third party claimant as a result of the statutory charge; or
  • non-performance of its contractual promise to advance defence costs and subsequently becoming liable to the insured for that non-performance (in addition to its liability to the third party claimant).

Similarly, directors with D&O policies which cover both liability to pay compensation to third parties and defence costs under a single limit of liability will be concerned that a statutory charge may prevent access to insurance desperately needed for defence costs.

In Australia, we do not yet to have the benefit of a High Court decision on the issue. We should know in coming months whether the High Court grants leave to appeal against the decision in Chubb Insurance Company of Australia Limited v Moore [2013] NSWCA 212.

Therefore, as it stands, the current law (at least in New South Wales) is that an insurer is able to advance defence costs from funds that would otherwise be available to cover liability to a third party claimant until such time as liability of the insured is established through a judgment or settlement.

You might also be interested in...

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 transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.