RegulationCase StudiesReports

Related stories

Bridgecorp: what it could mean for liability insurance

by Mark Radford of Radford Lawyers | Insurance Risk & Professional 15 Feb 2012

The Steigrad & Ors vs Bridgecorp Limited & Ors (Bridgecorp) case is of great significance for the Australian insurance industry. The effect of this case could be that in Australia (subject to certain jurisdictional issues):

  • where a policy exists that covers an insured's liability to pay damages or compensation (eg professional indemnity, directors & officers (D&O) and public liability etc); and 
  • an event occurs giving rise to such a liability or potential liability; and
  • the insurer is on notice of the potential claim;

a statutory charge can be created over all insurance monies to the extent necessary to satisfy such liability (or potential liability), which can practically stop beneficiaries of the policy from accessing the monies payable under the policy to the extent to such monies are necessary to satisfy the charge. This is a substantial issue in relation to a beneficiary's need to access cover for defence costs. 

 

Case summary

The New Zealand High Court judgment in Bridgecorp is likely to substantially affect all Australian liability policies, including professional indemnity, public liability and D&O policies and domestic policies providing liability, cover such as comprehensive motor and home policies. It does not affect CTP or workers' comp. 

In short, Bridgecorp considered section 9 of the New Zealand Law Reform Act 1936 (LRA), which applies to policies of insurance that provide cover for third-party claims against an insured. It essentially states that when an event occurs that might give rise to a claim for damages or compensation, a charge is created over all insurance moneys, which are or may become payable in respect of that liability - even though the amount of that liability may not have been determined. 

Section 6 of the New South Wales Law Reform (Miscellaneous Provisions) Act 1946 and similar legislation in the Northern Territory (sections 26-28, Law Reform (Miscellaneous Provisions) Act 1956) and the Australian Capital Territory (section 206, Civil Law (Wrongs) Act 2002) is based on and essentially the same as section 9. 

The purpose can be summarised as being to prevent any conspiracy between a defendant and an insurance company or any malpractice on the part of defendants in collecting insurance monies by way of indemnity for a liability that they do not discharge.

After the collapse of the Bridgecorp Group of companies, they were placed in receivership owing investors nearly $500 million. The directors faced numerous criminal and civil claims following the collapse, none of which had been resolved at the time of this Bridgecorp decision. Companies within the Bridgecorp Group that were in liquidation and/or receivership were seeking to institute civil proceedings against certain Bridgecorp directors for more than $450 million.

The Bridgecorp companies held a D&O policy with QBE under which:

  • the limit of indemnity was $20 million for any one claim and in the aggregate;
  • the directors were indemnified in respect of certain liability that they might incur in their acts or omissions as directors;
  • cover was provided in respect of any costs that the directors might incur in defending any such proceedings seeking to establish such liability; and
  • defence costs were subject to a sub-limit of $500,000 but covered within the overall limit of indemnity.

The directors also took out statutory liability insurance with QBE in 2000, providing them with cover for defence costs incurred regarding claims based on a breach of their statutory obligation up to a limit of $2 million for any one claim and in the aggregate.

The directors initially sought cover under the statutory liability insurance to pay the relevant defence costs and the limit was exhausted. There was no issue of this policy being caught by the charge. This would appear to be because it did not indemnify the directors against liability to pay any damages or compensation, only their own defence costs and certain fines and penalties. The directors then resorted to the D&O policy for the ongoing defence costs.

The Bridgecorp companies advised QBE that they asserted a charge over the monies payable under the D&O insurance policy for the amounts they intended to claim against the directors in civil proceedings under section 9 of the Law Reform Act 1936.

This was essentially because the defence costs formed part of the overall limit of indemnity and paying out the defence costs would have eroded to amounts the Bridgecorp companies would have been entitled to under the charge on the policy.

As a result, QBE advised the directors that it could make no further payments until the Bridgecorp companies and the directors reached agreement on the allocation of funds under the policy. No agreement was reached and the directors sought a declaration that the section did not prevent QBE from meeting its contractual obligation to reimburse the directors their defence costs. 

The Bridgecorp companies asserted that if the section did not prevent the defence costs being reimbursed, the policy limited the amount payable to $500,000. 

 

The verdict

The High Court found that:

  • the charge comes into existence before liability is declared to exist by a court or tribunal or liability. This is because the charge is created at the time of the happening of the event giving rise to the claim for damages or compensation (ie the time the Bridgecorp group collapsed);
  • the charge will come into existence even if the quantum of the claim is not determined (ie claim by claimant is not quantified, as was the case in Bridgecorp);
  • the charge applies to all insurance money that is or may become payable in the future (i.e. irrespective of the fact the insurer has not accepted the claim and/or where the insured has not established that the claim is covered by the policy as was the case in Bridgecorp);
  • if the potential claim is less than the policy limit the charge would only extend to the amount of the likely claim and its associated costs;
  • the charge has priority over all other charges affecting the insurance money. In relation to charges arising under the section, they have priority according to the date of the event giving rise to the charge;
  •  the charge, while in existence, remains conditional until the occurrence of:
  1. establishment of liability for a quantified sum; 
  2. the insured establishes  they are entitled to cover (eg insurer accepts claim or insurer liability to accept claim determined by legal proceedings; and
  3. the claimant obtaining judgement directly against the insurer as permitted under s9(4). 
  • There are limits to the scope and application of the charge:
  1. the valid payment by an insurer without actual notice of the existence of the charge will, to the extent of the payment, constitute a valid discharge of the insurers’ obligations under the policy; and
  2. where the insurer establishes that it is entitled to disclaim liability under the policy or where there is a vitiating factor in its formation (eg fraudulent non-disclosure), no charge will exist.

The High Court also noted that payment of defence costs should not reduce the pool of funds that would otherwise have been available to meet claims in respect of which a charge has arisen (per Pattinson v General Accident Fire and Life Assurance Corporation Ltd [1941] NZLR 1029 supported by Bailey v New South Wales Medical Defence Union Limited (1995) 184 CLR 399 at 443.

The court concluded that while the consequences were unsatisfactory, any payment of defence costs by QBE made with knowledge of that charge would effectively be an ex gratia payment, which wouldn’t reduce the limit of liability of the policy.

The court noted that the:

  • problem was partially a consequence of the fact that the directors took out a policy providing cover for both defence costs and claims for damages and  compensation; and
  • directors could have taken out a Statutory Liability policy providing greater cover for defence costs than the policy they  elected to take out. At no point was it in contention that monies payable under that policy were susceptible to a charge.

 

Practical impact

The effect of the decision would appear to be - subject to the appeal - that there's a real risk that an Australian court would follow the same reasoning. As a result, where a policy exists that covers an insured's liability to pay damages or compensation, and an event occurs giving rise to such a liability (or potential liability); a charge is created over all insurance monies to the extent necessary to satisfy such liability (or potential liability). 

Once the charge is created the beneficiaries of the policy will not be able to access the monies payable under the policy to the extent that such monies are necessary to satisfy the charge.

The key issues can be summarised as:

1. For the insurance industry

Insurers and insurance brokers will need to form views on the above and have procedures in place to manage these complex issues. In particular:

  • if an insurer makes a payment under a policy indemnifying an insured against a liability to pay compensation or damages when on notice of the charge (other than a payment in satisfaction of the charge) where the liability of the insured to the claimant could genuinely exceed the applicable policy limit, the payment made with knowledge of that charge would risk being made on an ex gratia basis and not reduce the limit of liability of the policy;
  • this will apply to defence costs payable to the insured where they are included within the over limit of liability;
  • the charge’s priority is dependent upon the time the event giving rise to the claim happened rather than time of notice of the charge and insurers would need to assess all competing notified charges before paying;
  • it is arguable that a charge should not apply to a claims made and notified policy that wasn’t in existence when the charge was created;
  • class action settlement will be made difficult because the charge is in favour of all potential claimants; 
  • if a claim has a sufficient connection to NSW, ACT or the NT, any payments made an insurer (eg defence costs or settlements) could be still caught;
  • insurers need to review what past payments may be affected by the decision (i.e. those paid when on notice); and
  • brokers need to consider whether they need to review an insured’s liability exposures and consider whether:
  1. an increased limit on existing policies will manage the risk;
  2. segregated limits for defence costs within a policy would be sufficient – there is a risk this may not work; and
  3. separate/restructured cover should be obtained, segregating defence costs in a stand-alone policy.

2. For the policy beneficiaries 

If the charge is enforceable against the policy, beneficiaries may not be entitled to access defence costs where the costs are part of the overall liability sum insured and may have to fund them themselves.

If the charge is not enforceable, beneficiaries will have to be able to cover the defence costs until the charge issue is resolved. The key risk is that in the case of a catastrophic claim brought against the beneficiaries they will not be in a position to mount an effective defence.

Given the complexity and potential significant impact of the above, the retrospective repeal or amendment of the sections should be considered.

 

IMPORTANT NOTICE

This document is designed to provide helpful general guidance on some key issues relevant to this topic. It should not be relied on as legal advice. It does not cover everything that may be relevant and does not take into account individual circumstances. It is only current as at the date of release. Individuals must ensure that they seek appropriate professional advice in relation to this topic as well as to the currency, accuracy and relevance of this material.


Advertising
Advertising

Follow us on:

Designed by eroomcreative | Engineered for success by EmpireOne