The receivers of certain Bridgecorp companies alleged they had claims (in excess of NZ$450 million) against the Bridgecorp directors for certain breaches of duty. The NZ Securities Commission was also prosecuting the directors.
The directors sought to access their directors and officers (D&O) policy with QBE (once a prior statutory liability policy had been exhausted) to fund the legal costs of the criminal trial. The limit of indemnity under the D&O policy was $20 million with a limit of $500,000 for defence costs.
The D&O policy indemnified the directors in respect of any civil or criminal liability that they might incur as a result of their acts or omissions as directors and also provided cover in respect of any costs that they might incur in defending such proceedings.
The receivers advised QBE that they asserted a “charge” per section 9 of the New Zealand Law Reform Act 1936 – which is equivalent to s6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) – over monies payable under the D&O policy for amounts they intended to claim from the directors in civil proceedings.
In summary, s6 (and the NZ equivalent) provides that in a situation where an insured under a policy of insurance no longer exists (due to death, insolvency, deregistration, etc) or is in administration or liquidation, s6 operates to create a charge over monies that would ordinarily have been paid out by the insurer on behalf of an insured to a third party.
Pursuant to s6, the third party may bring proceedings against an insurer directly to enforce a charge, but it must first obtain leave from the Court to do so. The purpose of these sections is to ensure that a bona fide claimant is not deprived of access to insurance monies because of these factors.
The limit of indemnity under the D&O policy was $20 million with a limit of $500,000 for defence costs.
The assertion of the charge prompted QBE to advise the directors that it would not make any payments under the D&O policy in respect of defence costs until the directors and receivers agreed on the allocation of funds under the policy. As no agreement could be reached, the directors sought a declaration from the High Court that the section did not prevent QBE from making such payments.
By way of counter-claim, the receivers contended that if the section did not prevent QBE from reimbursing the directors for defence costs, the directorswere only entitled to $500,000, which was the limit of liability under the policy for defence costs.
The receivers argued that the reimbursement of defence costs would reduce the amount available under the D&O policy for civil claimants, which would render the charge under the section ineffective.
The court held that even though the charge was conditional (on Bridgecorp establishing liability on the part of the directors and the directors establishing entitlement to cover under their policy), the charge prevented the directors from accessing the policy to meet their defence costs.
In coming to its conclusion, the court relevantly stated that: “s9 (1) charges all ‘insurance money’ that is or may become payable in respect of liability to pay damages or compensation. The use of the words suggests that, where the level of cover is less than the amount of a notified claim, the entire amount for which cover may be available is subject to the charge. The section does not contain any mechanism that would enable funds to be released to meet the insurer’s other obligations under the policy.”
The problem in this case arose because the relevant policy covered both defence costs and claims for damages and compensation, which is common practice in Australia.
The practical impact for brokers and their clients is that directors may have to consider purchasing separate cover for defence costs so as to quarantine the cover from any claim for damages and compensation and the charge arising from s6.
The issue in relation to the entitlement to defence cost under an insurance policy where a charge is asserted over the proceeds of insurance monies has not been considered in Australia. As a result, brokers should take special care when advising on policies of this nature, especially until the law is confirmed in Australia one way or the other.
(1) Steigrad & Ors v BFSL 2007 Ltd & Ors HC AK CIV-2011-404-611 [2011] NZHC 1037 (15 September 2011).
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