Yesterday the Court of Appeal of New Zealand delivered its judgment in the much anticipated appeal of the Auckland High Court decision of Steigrad v BFSL 2007 Limited (Bridgecorp). The appeal was heard in conjunction with Chartis NZ v Houghton, dealing with similar subject matter. While not binding on Australian courts, the Bridgecorp decision, handed down on 15 September 2011, caused shockwaves throughout the Australian and New Zealand D&O market, leading insurers to restructure their D&O policies (to ensure directors have access to funds for defence costs) and the creation of entirely new insurance products such as D&O 'companion policies'. John Edmond, Partner, and Simon Black, Senior Associate, of Clyde & Co Australia report.

The Bridgecorp decision

By way of brief summary of the original Bridgecorp decision, the Bridgecorp Group collapsed and was placed into receivership owing investors some NZD 500 million.

The receivers asserted claims against various Bridgecorp directors for alleged breaches of their duties as directors. The receivers estimated the quantum of that claim at more than NZD 450 million.

At the same time, the directors were the subject of a criminal prosecution by the New Zealand equivalent of ASIC. That prosecution was on the cusp of trial. In order to defend themselves in the trial, the directors wanted to access the NZD 20 million cover provided under their D&O policy.

To preserve the funds available under the policy, the receivers asserted a charge over any insurance proceeds that may be payable in relation to the receiver's claim, citing section 9 of the Law Reform Act 1936 (NZ).

Lang J of the Auckland High Court was asked to determine whether the receivers' section 9 charge prevented the directors from obtaining reimbursement under the policy for their defence costs incurred in relation to the trial.

His Honour held that, in circumstances where the insurer was aware of a claim for an amount greater than the limit of indemnity under the policy, any payments by the insurer towards the directors' defence costs under the policy would not reduce the sum subject to any charge pursuant to section 9 of the act. The court held that, to allow this would render the charge created by section 9 ineffective, resulting in either a reduction in the funds available for the civil claimants, or requiring the insurer to pay defence costs in addition to the overall policy limit.

In effect, the Court's finding in Bridgecorp meant that any payment by an insurer would be made as a volunteer and it would still remain liable to pay the full indemnity sum to the third party claimants. This had the practical effect of freezing the payment of defence costs under liability policies that did not expressly separate defence costs from coverage for liability for compensation.

While obviously a concerning decision for D&O insurers in New Zealand, the similarities between the New Zealand Law Reform Act and legislation in New South Wales, the Australian Capital Territory and the Northern Territory1, meant that uncertainty was also created in the Australian D&O market and other liability markets beyond that.

Bridgecorp Appeal

The hearing of the Bridgecorp Appeal was held on 5 September 2012, before O'Regan, Arnold and Harrison JJ. The Court's decision, handed down yesterday, can be summarised in four short points which will have implications for insurers on both sides of the Tasman:

  • the appeal is allowed;
  • the declaration by the High Court is quashed;
  • Bridgecorp's application for leave to adduce further evidence is dismissed; and
  • Bridgecorp must pay costs to Mr Steigrad2.

In allowing the appeal, the Court has overturned the finding of the High Court in Bridgecorp on two grounds:

  • firstly, on the grounds that section 9 of the act does not apply to insurance monies payable in respect of defence costs, even where such cover is combined with third party liability cover and made subject to a single limit of liability; and
  • secondly, that section 9 of the act is limited in scope and is not intended to rewrite or interfere with contractual rights as to cover and reimbursement. Although not determinative in this case, the Court concluded that "the purpose of s 9 is not to rewrite the bargain struck between the parties."

Importantly, the Court held that the appeal would have succeeded on the first of these grounds alone.

In concluding that section 9 could not be used by the receiver to apply a charge over the directors' entitlement to defence costs, the Court stated unequivocally that:

"...Bridgecorp is not entitled to a statutory charge over insurance money lawfully payable by QBE to Mr Steigrad to reimburse his existing liability to pay defence costs incurred with the insurer's consent or otherwise as opposed to a contingent liability for damages or compensation payable to Bridgecorp."

Taking this one step further (in a comment which will be of interest both to insurers who have developed companion D&O policy coverage, or re-worded their existing D&O policies, and entities taking out such cover) the Court goes on to state:

"...there was no suggestion that, if there had been separate defence costs and third party liability policies, section 9 would have applied to the defence costs policy. Combining the two forms of cover – defence costs and third party liability – in a single policy with separate sums insured would not affect this outcome. In our view, combining the two forms of cover in a single policy subject to a single sum insured does not change the analysis either. There is a single, aggregated fund from which the two distinct liabilities can be met. The charge attaches to the balance that is available to meet third party claims after any defence costs liability has been met."

And again the Court drew the sensible conclusion that:

"The existence of a single, aggregated limit – cannot operate to deprive Mr Steigrad of the right to obtain reimbursement for his defence costs as that would render his defence costs cover, in practical terms, useless."

The Bridgecorp Appeal, therefore, confirms that (in New Zealand at least) a section 9 charge cannot be used to deprive a director from seeking reimbursement for his defence costs under a D&O policy for amounts which are distinct from a third party liability owed (or potentially owed). In short, the decision places insureds and insurers back in the position they probably thought they were in prior to Bridgecorp.

Implications

We expect that the decision will be welcomed by insureds, brokers and insurers to the extent that it provides some certainty as to how the law in this area operates and how D&O protection should be structured.

We also anticipate renewed discussion in the industry about the language to be used in D&O products going forward and whether it is still necessary for directors and officers to take out separate defence costs cover to ensure that protection is in place when they need it.

Footnotes

1 For example section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).

2 In relation to the concurrently heard matter of Chartis v Houghton, the court concluded that Mr Houghton not presently entitled pursuant to section 9 of the Law Reform Act to charge money payable by Chartis to Mr Saunders and his co-insured pursuant to a prospectus liability insurance policy in reimbursement of their defence costs incurred in defending a claim or claims brought against them by Mr Houghton and others.

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.