In Chubb Insurance Company of Australia Limited v Moore  NSWCA 212 the Supreme Court of NSW Court of Appeal decided that a charge by creditors under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LRA) over directors’ and officers’ (D&O) insurance policies does not prevent an insurer from advancing defence costs to an insured party.
Although in this case the charge did not apply for jurisdiction reasons the Court made a number of important comments about section 6.
Following the collapse of Great Southern Limited (Great Southern) and its subsidiaries proceedings commenced in two states. The plaintiffs claimed damages from former directors and executives of Great Southern, alleging contraventions of the various Acts, and that section 6 of the LRA gave them priority over legal expenses incurred by the directors and executives of Great Southern in defending those proceedings.
All of the defendants in all of the Great Southern Proceedings are insured persons under contracts of insurance entered into between GSL, on the one hand, and the Insurers on the other. The Policies cover the liability that the Executives and GSMAL may be found to have in the Great Southern Proceedings. However, in addition, the Policies cover legal expenses incurred by the defendants in the Great Southern Proceedings in defending those proceedings. The essential question that gave rise to the present proceeding is whether s 6 affords priority to the GS Claimants over the defendants in the Great Southern Proceedings (the GS Defendants) in relation to moneys that may be payable under the Policies.
The court found that the statutory charge created by section 6 does not prevent an insurer from advancing defence costs to an insured party:
"Section 6 of the Reform Act was enacted to address a perceived unfairness that could arise where a person is insured against a liability, that liability arises, the insured obtains a sum from its insurer and then the insured either disappears or fritters away the sum or enters into a collusive arrangement with the insurer. In such situations, even if a claimant obtains a verdict against the insured wrongdoer, he or she may not recover any sum from the insured ...
The charge is concerned with moneys payable in respect of that liability, being the liability of the insured to pay damages or compensation to the claimant. The charge is not expressed to catch all moneys that might be payable under the contract of insurance....
Even if s 6 of the Reform Act imposed a charge on any insurance moneys that are or may become payable under the Policies in respect of the liability of an insured person to pay damages or compensation to any of the Transform Claimants or the PDS Claimants, such charge would not extend to insurance moneys payable in respect of defence costs, legal representation expenses or costs and expenses that are paid by the Insurers in accordance with the Policies before judgment is entered or settlement is agreed in respect of the claim for damages or compensation of the relevant Transform Claimant or PDS Claimant."
Background: NZ Bridgecorp decision
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Posted 27th August 2013
by David Jacobson
in Corporate Governance, Insurance