The recent decision of the High Court of New Zealand in Steigrad v Bridgecorp 1 (Bridgecorp decision) has caused a stir amongst directors. It raises concerns over the recoverability by directors under traditional directors and officers insurance policies (D&O policies) for their legal costs in defending a claim against them.
The Bridgecorp decision also raises the question of how the traditional D&O policy can be restructured to give greater certainty that the D&O insurer will cover and advance defence costs to a director.
In the Bridgecorp decision, the High Court of New Zealand found that the directors of the collapsed Bridgecorp Group could not access the funds under their D&O policy to meet the costs of defending claims made against them for breach of directors' duties, as a result of a statutory charge that had arisen over the insurance money in favour of the claimants pursuant to section 9 of the Law Reform Act 1936 (NZ) (NZ Act).
As there are laws in NSW, ACT and the Northern Territory which are on terms substantially identical to and have been modelled on section 9 of NZ Act, the implications of the Bridgecorp decision are important for Australian directors and officers.
How did the Bridgecorp decision arise?
Facts
The Bridgecorp Group (Group) was placed into receivership in 2007. The directors of the Group (Directors) faced numerous civil and criminal claims, including a potential civil claim by the receivers of the Group (Receivers) for more than $450 million for breach of their common law and statutory duties to the Group companies.
Under the Group's D&O policy (Policy), the Directors were insured against liability for both damages and compensation as well as defence costs up to a limit of $20 million in aggregate.
It was clear from the outset that the Receivers' claim against the Directors exceeded the Policy limit. Further, given the multitude of claims instituted against the Directors, it was clear that if any reimbursement was made to the Directors under the Policy for their costs in defending those claims, this would significantly reduce the insurance money available to compensate claimants (including the Receivers), if their actions against the Directors were successful.
Accordingly, the Receivers sought to assert a first charge over all money payable under the Policy in reliance on section 9 of the NZ Act and argued that, by operation of this statutory charge, the Receivers' claim over any money payable under the Policy had priority over any payments for defence costs claimed by the Directors under the Policy.
The Directors sought a declaration from the High Court of New Zealand that the statutory charge did not prevent its insurer from reimbursing the Directors for their defence costs.
Decision
On an analysis of section 9 of the NZ Act, Justice Lang of the High Court found, having regard foremost to the words of the provision and then its object and purpose, that a statutory charge had arisen in favour of the Receivers over all money payable under the Policy (as the amount of the Receivers' claim was greater than the level of cover under the Policy). His Honour also found that as section 9(1) of the NZ Act stated that the charge arises "on the happening of the event giving rise to the claim for damages or compensation", the statutory charge came into existence well before any liability was declared to exist, or was quantified, by a court. In this case, the charge in favour of the Receivers arose at the time the Bridgecorp Group collapsed.
Lang J further found that:
- the fact that the quantum of the claim had yet to be determined would not prevent the charge from coming into existence; and
- the charge applied both to insurance money that was payable and to that which may become payable.
Although the charge remained conditional until the establishment by the Receivers that the Directors were liable for a quantified sum and the establishment that the Directors were entitled to cover under the Policy, the charge prevented the Directors from having access to the Policy to meet their defence costs.
On the one hand, Lang J recognised that this result may be harsh, and even unfair, for the Directors given that the Policy was taken out at least in part for the specific purpose of meeting the Directors' defence costs.
On the other hand however, his Honour pointed out that the decision fell squarely within the underlying intent of section 9, namely, to ensure a more effective procedure for enforcing a plaintiff's entitlements against a defendant by allowing the plaintiff to have direct access to the defendant's insurance fund ahead of the defendant. In this case, if the Directors were able to obtain access to funds under the Policy to meet their defence costs, the pool of funds available to meet civil claims would be significantly depleted and this would have the effect of defeating the purpose of the statutory charge.
Lang J noted that, had the Receivers' claim been less than the Policy limit, the position is likely to have been different:
"In those circumstances, the charge could only extend to the likely amount of the claim and its associated costs. The insured may therefore be able to gain access to the policy to meet defence costs ."
His Honour made clear that section 9 does not give the Receivers wider rights against the Directors than they would otherwise have:
"the claimant does not become entitled to recover a greater sum than that already recoverable".2
Rather, the operation of section 9 seeks to deter directors from pursuing meaningless litigation and escalating defence costs at the expense of claimants and entering into corruptive arrangements with the insurer whereby the insurer pays an agreed sum to the director in return for a discharge from any further liability to indemnify them under the policy.
What are the implications of the case?
Most D&O policies are premised on the company first indemnifying a director against liabilities incurred by them in their capacity as a director before the director is indemnified under the D&O policy. Having indemnified a director, the company would then claim under the company reimbursement section of the D&O policy to be reimbursed.
A typical deed of indemnity in favour of a director usually includes a right for an indemnified director to receive an advancement of defence costs from the company. Where the company is solvent and has the ability to honour its indemnity, the Bridgecorp decision is unlikely to have much practical significance for directors and officers. This is because, even if the company cannot recover from the D&O insurer, the company will have to meet its indemnity to the director from its own resources.
The Bridgecorp decision is of particular significance in the circumstance where the company is insolvent or financially unable to meet its obligations under the deed of indemnity in favour of the directors and therefore the directors have to seek cover from the D&O policy. In such a situation, the Bridgecorp decision highlights how directors can lose the entire benefit of cover for their defence costs where:
- there is no separate cover, or separate insurance limit, under the D&O policy for defence costs and for claims against the director for damages and compensation; and
- the policy limit is insufficient to cover both outgoings.
Further, the language of section 9 (and its Australian equivalents) is broad enough to extend to any contract of insurance (not just D&O policies). Therefore, the Bridgecorp decision could apply to any insurance policy where cover for the insured's liability for damages and compensation and for the insured's other costs fall within a single policy limit.
What should companies do in the meantime?
The Bridgecorp decision is currently on appeal in NZ and indeed, may not be followed in Australia. However, until a similar issue is considered in Australian courts, it would be prudent for companies to review their D&O and other insurance policies to see where the Bridgecorp decision could affect those policies and consider:
- the adequacy of the limits of liability under those policies;
- obtaining stand-alone cover for defence costs (and other costs), separate from cover for claims for damages and compensation; and/or
- where separate insurance products are not available, establishing separate limits under the one policy for liabilities for damages and compensation on the one hand, and for defence and other costs on the other.
Companies should also consult their insurance brokers as to the full range of insurance products available and how separating insurance covers may affect aggregate policy limits and premiums.
It is also timely for companies and directors to review the adequacy of their directors' and officers' indemnities.
The assistance of Belle Jing, Solicitor, of Addisons in the preparation of this article is noted and greatly appreciated
Footnotes
1 HC Auckland, CIV-2011-404-611. 15 September 2011, Lang J.
2 Bridgecorp decision at [23], citing FAI General Insurance Co Ltd v Blundell and Brown Ltd [1994] 1 NZLR 11 at 17 (Richardson J).
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.
