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January 15, 2013

Insurance for directors’ legal defence costs

In Steigrad v BFSL 2007 Ltd [2012] NZCA 604 the New Zealand Court of Appeal allowed appeals in two separate actions relating to insurance coverage of legal costs of directors of companies which became insolvent.

Both policies contained a single limit of liability covering both liability and defence costs claims. The issue was how a third party's claim on a policy affects such policies, in particular in relation to the payment of defence costs after the claim has arisen and been notified.

Steigrad's appeal related to the Bridgecorp group, previously discussed here.

In relation to Bridgecorp the NZ High Court decided that the Bridgecorp directors were prevented from having access to their company’s D & O policy to meet their defence costs because there were civil claims by investors relating to the collapse of Bridgecorp that were potentially in excess of the $20 million limit of the D&O policy. That decision has been reversed.

In the other action Chartis Insurance sought a declaration whether it could pay defence costs of former Feltex directors notwithstanding notice of a charge by Feltex investors on the prospectus liability policy. The Court of Appeal made that declaration.

In allowing the applications the Court of Appeal said:

"In our judgment Mr Steigrad’s appeal must succeed on two interrelated grounds:
(a) s 9 [the charge] does not by its terms apply to insurance monies payable in respect of defence costs, even where such cover is combined with third party liability cover and made subject to a single limit of liability; and

(b) s 9 has limited effect and is not intended to rewrite or interfere with contractual rights as to cover and reimbursement....

We conclude that the statutory charge does not prevent QBE from meeting its obligation under the policy to reimburse defence costs. The only reason that the contrary can be argued is that there is a single, aggregated limit of liability in the policy. In our view, that factor – the existence of a single, aggregated limit – cannot operate to deprive Mr Steigrad of the right to obtain reimbursement for his defence costs as that would render his defence costs cover, in practical terms, useless. That is not what s 9 was intended to achieve. ... s 9 is simply a legal mechanism to divert to a third party funds that would otherwise be available to settle a contractual obligation to indemnify the insured for liability to that third party. The amount of the funds available in Mr Steigrad’s case will be determined once the other cover provided by the policy – defence costs cover – has been determined....

In the present case, the statutory charge created by s 9 has not crystallised – it remains contingent. It will not crystallise unless and until QBE becomes legally liable to meet any damages or compensation that Mr Steigrad must pay Bridgecorp, whether as a result of judicial decision, arbitration or settlement. That requires, first, that Mr Steigrad’s liability to Bridgecorp be established; and second, that QBE’s liability to Mr Steigrad under the policy be established. In the meantime, the amount, if any, of the insurer’s contingent liability is unknown. At present QBE’s only crystallised liability is to pay Mr Steigrad’s defence costs."

Because of the similarity of the NZ legislation to that of some Australian states, Australian directors should keep these issues in mind when next reviewing their cover.

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Posted 15th January 2013 by David Jacobson in Business Planning, Corporate Governance, Insurance