Burning Bridgecorp

There were sighs of relief from boardrooms across the country earlier this year when a NSW court quashed doubt about the ability of Directors’ and Officers’ Liability (D&O) cover to pay defence costs of insured parties in some scenarios.

Earlier this month, the NSW Court of Appeal ruled that the controversial Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 did not preclude insurers from meeting the defence costs of insureds protected by D&O policies.

The legislation closely mirrors that behind the notorious Bridgecorp decision in the High Court of New Zealand in 2011, where QBE was prevented from releasing funds from a D&O policy to pay directors’ legal defence costs because liability claims were likely to exceed the policy’s $20 million limit.

Describing Section 6 as “somewhat enigmatic” and unclear, the NSW judgment on Chubb Insurance Company of Australia Limited v Moore 2013 calls for it to be “completely redrafted in an intelligible form, so as to achieve the objects for which it was enacted”.

Insurance Council of Australia General Manager of Communications Campbell Fuller says the ICA has made two submissions to the NSW Attorney-General’s department arguing for the reform.

“The Department was receptive to the ICA’s arguments but wanted to consider the case for reform after the NSW Court of Appeal brought down its decision in the Chubb v Moore case,” he says.

The NSW Attorney-General has confirmed a possible amendment is being considered.

The path ahead

Guy Narburgh, Senior Associate at Herbert Smith Freehill, says although the possibility of an appeal means some uncertainty remains, the decision is a welcome one. “There is still a very small residual risk,” he says. “But I think it’s given everyone very considerable comfort.”

Narburgh says the controversy around the Great Southern and Bridgecorp cases has raised awareness of the risks directors and officers face.

“There has been a huge increase in instances of clients wanting reviews of their D&O policies,” he says. “The last time there was this much focus on D&O was during HIH [in 2001]. There’s been a lot of discussion and it’s really got people aware that this is something to have thought about.”

Although most ASX-listed companies have D&O policies in place, there remains much underinsurance. A 2011 survey found just 16% of all Australian businesses have D&O cover in place.

According to Narburgh, this is a time of opportunity, with D&O increasing in importance thanks to increased litigation, the rising threat of class actions and growing numbers of insolvencies.

There’s been a lot of discussion and it’s really got people aware that this is something to have thought about.

Case summary

Prior to collapse in 2009, Great Southern and its related entities operated various agricultural managed investment schemes. In Chubb v Moore, insurers sought declarations from the Court as to whether they are able to, or continue to, advance defence costs to the executives under their directors and officers (D&O) and professional indemnity (PI) insurance.

The Court agreed with the conclusion of the New Zealand Court of Appeal in Bridgecorp that Section 6 does not apply to insurance monies payable in respect of defence costs, even where it is combined with third party liability cover and made subject to a single limit of liability.

Overall the decision is a sensible one and good news for the insurance industry and insureds, but the decision only applies in relation to the NSW legislation and is likely to be appealed so watch this space. Consideration may need to be given to whether proceedings under a policy can be limited to jurisdictions not subject to the relevant charge.

Key Points

  • If defence and other costs in a liability policy have a separate limit to the liability limit, the Section 6 charge will not apply to them.
  • Insurers can pay advance defence and other costs that are combined within the overall limit of liability up until they get notice of the charge under Section 6 AND before judgment is entered or a settlement is agreed in respect of the claimants’ claim.
  • The charge is in effect from the time the event giving rise to liability under the policy occurs.
  • Section 6 does not create a charge based upon a claim arising from an event that has, or events that have, occurred prior to the inception of the policy.
  • Competing claims under Section 6 will only arise where a judgment is obtained in favour of a number of claimants whose claim arise out of the same or similar facts.
  • Section 6 only applies to claims brought in a NSW Court.