New Zealand's Highest Court Makes Life Difficult for D&O Policyholders (and Their Insurers)

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The Supreme Court of New Zealand (Court) last month handed down the latest in a series of decisions, both in New Zealand and Australia, relating to the enforceability of 'statutory charges' over insurance monies – and it is not good news for Directors and Officers (D&O) insurance policyholders or their insurers.

Background

Legislation in New Zealand and some states of Australia (New South Wales (NSW), the Australian Capital Territory (ACT) and the Northern Territory) provides for the creation of a statutory charge over insurance monies in favour of third party claimants.

The purpose of the legislation is to enable plaintiffs to recover insurance monies directly from the insurer of an insured defendant, where that plaintiff's claim is successful. The legislation aims to prevent unfairness to plaintiffs who would otherwise be unable to recover damages against insolvent, but insured, defendants.

The legislation has given rise to significant litigation both in New Zealand and NSW, specifically in relation to D&O policies, which provide cover for both third party liability and defence costs. The key issue is whether the statutory charge operates to stop D&O insurers first advancing payments for directors and officers' defence costs in circumstances where the same policy also provides cover for payments of compensation to third party claimants.

Bridgecorp

Following the 2007 collapse of the Bridgecorp finance group in New Zealand, the receivers of Bridgecorp commenced civil proceedings against three of its directors, including a Mr Steigrad, seeking more than AUD300 million in damages on behalf of out of pocket investors. Bridgecorp held a AUD20 million D&O policy, which indemnified its directors for liability incurred to third parties as a consequence of their actions as directors. The same policy also provided cover for the directors' defence costs.

In BFSL 2007 Ltd & Ors [in liq] v Steigrad [2013] NZSC 156, the Court (the country's highest court) held that Bridgecorp was entitled to a charge over all of the AUD20 million D&O policy, to the exclusion of the directors' defence costs, finding that, "the statutory charge… arises on the happening of the event giving rise to the claim and secures the full amount of the liability to a third party claimant as eventually established through judgment on, or settlement of, the claim". As a result, the directors' defence costs can not be paid out of the D&O policy before any insurance proceeds, available to any successful third parties, are paid out of the same policy.

The Court criticised the insurer, QBE and the directors, for not having taken proper account of the statutory charge legislation when drawing the policy, and left open the question of whether the insurer should be liable to pay the directors' defence costs in addition to the full amount of the statutory charge.

Great Southern

The New Zealand position is to be contrasted with that taken by the NSW Court of Appeal in July 2013, in Chubb Insurance Company of Australia Ltd v Moore [2013] NSWCA 212. That case arose out of the collapse of the Great Southern Group (GSG), which resulted in class actions in both Victoria and Western Australia against former directors and officers of GSG.

The NSW Court of Appeal was asked to consider whether the NSW legislation (similar to that in New Zealand) prevented the D&O insurers from advancing defence costs to the insured directors, in circumstances where the relevant policy also provided cover for third party liability.

The NSW Court of Appeal held that the NSW legislation only applied to proceedings commenced in that state, and was, therefore, of no relevance to the GSG litigation, effectively clearing the D&O insurers to advance defence costs to the defendant directors and officers. The Court went on to say that, had it been required to make a finding, it would have held that the statutory charge would not attach to defence costs, and the legislation was not intended to interfere with the contractual rights of the parties to the D&O policy.

Without a final definitive ruling on the subject in Australia, some uncertainty remains, particularly with a special leave application in the GSG litigation pending in the High Court of Australia. In the meantime, it makes a great deal of sense for directors and other insureds, particularly in those jurisdictions where statutory charges apply, to purchase separate polices covering third party liability on the one hand, and defence costs on the other.