23 December 2013

Ghost of Christmas past – directors’ defence costs and the Bridgecorp litigation

Last Christmas, the New Zealand Court of Appeal handed down its decision about the effect of statutory charges on the payment of defence costs by D&O insurers. 

Yesterday, the Supreme Court of New Zealand set aside the Court of Appeals decision, concluding that where there was insufficient insurance cover to meet both third party claims and a director's or officer's defence costs, an insurer could only meet the latter at the peril of falling foul of the statutory charge created pursuant to the Law Reform Act 1936 (NZ) s 9 (at [9]). Defence costs did not fall within the scope of the charge, and the existence of the charge could significantly impact upon the contractual right of a director or officer to be advanced or reimbursed for those costs. While the Supreme Court did not decide whether an insurer could refuse to pay defence costs (as that question was not directly before it), it suggested that an insurer was entitled to be cautious about payment of defence costs when faced with a claim subject to the charge.

This reverses the finding of the New Zealand Court of Appeal, which concluded that an insurer could advance defence costs without falling foul of the New Zealand statutory charge provision (the equivalent of which is found in Law Reform (Miscellaneous Provisions) Act 1946 (NSW) s 6, and in similar legislation in the ACT and NT).

Where are we now?

There now appears to be a significant divergence between the position in Australia and New Zealand in relation to whether the statutory charge can override directors and officers' rights to indemnity for defence costs. The answer in Australia - at least for the time being - is NO (see below). In New Zealand, the answer seems to be PROBABLY.

It remains to be seen how D&O insurers will practically respond to the decision.

The position taken by the New Zealand Supreme Court is at odds at least in its effect with the opinions voiced earlier this year by the New South Wales Court of Appeal in Chubb Insurance Company of Australia Limited v Moore [2013] NSWCA 212. While the NSW Court of Appeal also excluded defence costs from the scope of the charge, that court took the view (without needing to decide) that the charge did NOT interfere with the contractual rights of directors and officers to be paid their defence costs. This was an important decision for directors and officers joined to class action proceedings and other large scale litigation, where the value of the claims was likely to exceed the policy cover. That decision is currently the subject of an application for special leave to the High Court of Australia.

What do you need to do?

Insurers have introduced new policy products as a response to the Bridgecorp risk. Directors and officers should continue to closely monitor their D&O cover to ensure that they are adequately protected in light of the continuing uncertainties.

The decision of the Supreme Court of New Zealand can be accessed here.

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