A recent High Court decision emphasises the need for directors to examine the wording of their directors and officers ('D&O') insurance policies in order to ensure there is adequate defence coverage in the event of a claim as well as highlighting an alternative means of recovery for a claimant.
In Steigrad & Ors v BFSL 2007 Limited & Ors (HC Auckland, CIV-2011-404-611, 15 September 2011) the High Court held that a statutory charge prevented the insured directors from accessing the funds in their D&O insurance policy to cover their litigation defence costs.
D&O policy and statutory liability policy
The Steigrad case arose out of the collapse of the Bridgecorp group in July 2007. The plaintiffs were directors of companies within the Bridgecorp group, and the first and second defendants were Bridgecorp group companies which are all in receivership and/or liquidation ('Bridgecorp Claimants'). The Bridgecorp Claimants sought recoveries for the benefit of investors and company creditors.
The directors faced numerous criminal and civil claims following the collapse of the Bridgecorp group. In addition, the Bridgecorp Claimants advised the directors that they intend to file civil proceedings against them.
The Bridgecorp companies held a D&O insurance policy with QBE, (the third defendant) with an indemnity limit of $20 million. Broadly, the policy indemnified the directors in respect of any civil and criminal liability they might incur as a result of their acts or omissions as directors. It also provided cover for costs they might incur in defending civil and criminal proceedings seeking to establish such liability.
In addition to the D&O policy, the directors took out a separate insurance policy which provided cover for defence costs incurred in respect of claims based on breach of their statutory obligations ('statutory liability policy'). At the time of the Bridgecorp group collapse, the directors had statutory liability policy cover up to a limit of $2 million.
Charge pursuant to s 9 of the Law Reform Act 1936
When the first proceedings against the directors were commenced,
QBE and the directors agreed to first use the statutory liability
policy to pay the associated defence costs. By August 2011, the
statutory liability policy funds had been exhausted, and the
directors had to resort to the D&O policy to meet ongoing
In June 2009, the Bridgecorp Claimants advised QBE that they asserted a charge over moneys payable under the D&O policy for amounts they intended to claim from the directors in civil proceedings pursuant to s 9 of the Law Reform Act 1936.
Section 9 creates a charge in favour of a third party claimant, over the funds that may be payable under an insurance policy held by the person against whom the claim is made. This charge is enforceable by a third party claimant by way of action directly against the insurer.
The purpose of s 9 is to provide claimants with a means of redress against the insurer in circumstances where proceedings against the insured cannot proceed (for example when the insured is insolvent). The charge is also designed to prevent an insured from receiving and disbursing the proceeds of an insurance claim for purposes other than satisfying the claim in respect of which the insurer made the payment.
Following the Bridgecorp Claimants' notification, QBE advised the directors that it would not make any defence costs payments under the D&O policy until there was agreement over the allocation of the D&O policy funds. As the directors and Bridgecorp Claimants could not reach an agreement, the directors applied to the High Court for a declaration that s 9 did not prevent QBE from reimbursing the directors for their defence costs pursuant to the D&O policy.
The effect of a s 9 charge on the D&O policy funds
The Court found that even though the charge in favour of the Bridgecorp defendants remained conditional on:
- The Bridgecorp Claimants establishing that the directors were liable to them for a quantified sum; and
- The Bridgecorp Claimants or the directors establishing that the directors were entitled to cover in respect of their liability to the Bridgecorp defendants,
QBE was bound to keep the D&O policy fund intact for the benefit of the Bridgecorp defendants and any other civil claimants who might have priority over them.
In Justice Lang's view the wording of s 9 made it clear that the statutory charge had priority over all other charges that affected the D&O fund, and therefore the insured should not be placed in a better position than his or her secured creditors by having first access to the D&O policy funds.
Accordingly, Justice Lang made a declaration that the charge under s 9 in respect of the claim to be brought by the Bridgecorp defendants prevented the directors from having access to the D&O policy to meet their defence costs even though the Bridgecorp Claimants had not yet filed a claim against the directors and may not do so for some time.
The outcome of the Steigrad case arose partly as a result of the Bridgecorp companies' election to take out an insurance policy that provided cover for both defence costs and claims for damages and compensation. As the statutory liability policy was not susceptible to a charge under s 9, the directors would have been protected if they had increased the cover for defence costs under their statutory liability policy rather than looking to their D&O policy to meet these costs.
The Steigrad decision was being appealed, however it is questionable whether this will proceed, with the imprisonment of the majority of the Bridgecorp directors. In the meantime it is important to consider its wide-ranging effect. While this case considers only D&O policies, the decision is likely to also apply to professional indemnity policies which provide cover for both damages and defence costs. It also highlights an alternative means of recovery for a claimant as the s 9 charge is enforceable by a third party claimant directly against the insurer.
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.