Supreme Court overturns Steigrad decision on directors' defence costs

Monday 23 December 2013

Authors: Murray Tingey and David Friar

​Christmas came early for investors in failed finance company Bridgecorp, in the form of a Su​​​preme Court ruling that Bridgecorp's claim to insurance money under a $20 million D&O policy has priority over the payment of defence costs to directors under that policy.

By a majority of 3 to 2, the Supreme Court reversed the Court of Appeal's earlier decision in the case. This means that third party claimants have a charge with priority over all insurance moneys payable under policies with a single indemnity for both third party liability and defence costs.

The immediate effect of the decision will be to allow investors in failed finance companies with claims against directors to claim the full amount of all available insurance money.

However, the Supreme Court left open whether, in addition to meeting the charge, an insurer must also pay defence costs, even if that means that the insurer may be liable for more than the limit of indemnity under the policy.

The market had responded to the High Court decision by offering separate policies or single policies with separate indemnities for third party liability and defence costs. We strongly recommend that directors and other insureds ensure that they separate their cover in this way, to preserve their ability to claim defence costs.

Bell Gully acted for the receivers of Bridgecorp in the proceedings, and successfully appeared in the Supreme Court on behalf of the receivers.

Background

The decision, BFSL 2007 Ltd v Steigrad [2013] NZSC 156, concerned the Bridgecorp group, which collapsed in July 2007 owing investors nearly $500 million. Mr Steigrad and his fellow directors were convicted of offences under the Securities Act. The receivers of Bridgecorp have brought civil proceedings against Mr Steigrad and two other directors, seeking damages in excess of $340 million on the basis that they breached their duties as directors.

Bridgecorp holds a D&O policy with a $20 million limit of indemnity. The D&O policy indemnifies the directors for any liability they may incur to third parties as a result of their actions as directors. It also provides cover for costs incurred in defending civil or criminal proceedings seeking to establish the directors' liability. In addition, Bridgecorp has a statutory liability policy with a $2 million limit of indemnity. That policy covers directors' defence costs, but does not cover directors for any liability to third party claimants.

By August 2011, all but one of the directors had exhausted their entitlements under the statutory liability policy. The directors estimated that they would incur another $3 million in costs to defend their criminal trial, and sought to claim these costs under the D&O policy. In addition, the directors wished to use the D&O insurance money to defend Bridgecorp's civil claim against them. This meant that there was a substantial risk that there would be no insurance money remaining under the policy to go to Bridgecorp's investors if the claim against the directors succeeded.

Bridgecorp therefore asserted a charge under section 9 of the Law Reform Act, and claimed that as a result, it had a claim to the insurance money in priority to the directors. The directors disagreed, and sought a ruling from the High Court.

High Court

Section 9 of the Law Reform Act gives a charge over any insurance money that is or may become payable in respect of an insured's liability to pay damages or compensation. The High Court ruled that because all of the $20 million of insurance money may become payable to Bridgecorp, Bridgecorp had a charge over that entire sum, and that the directors were not able to access that sum to pay their defence costs.

Court of Appeal

The Court of Appeal overturned the High Court decision. It ruled that the charge arising under section 9 only crystallises over the balance of the policy limit that is available to meet third party claims after any defence costs liability has been met. It also said that section 9 cannot operate to interfere with or suspend the performance of mutual contractual rights and obligations relating to another liability.

Supreme Court

By a majority (Chief Justice Elias, Justice Glazebrook and Justice Anderson), the Supreme Court allowed Bridgecorp's appeal. The majority ruled that there is "strong textual support for the proposition that the charge arises at the time the event giving rise to liability occurs and that it secures whatever the full amount of the liability (if any) to the third party ultimately turns out to be".

The majority said that, as a matter of policy, defence costs should not be allowed to deplete the insurance money available to a successful third party, because in substance this would require the claimant to fund the insurer's unsuccessful defence.

The majority concluded that QBE and the directors of Bridgecorp had "made a poor bargain because the policy has not been properly drawn", as they had "overlooked the effect of the statutory charge". They left open the question as to who should bear the costs of this, the insurer or the insured. That is, there is now a possibility that that the insurer may be required to pay the third party claimant the full amount of the charge (up to the policy limit), as well as the insured's contractual right to be paid defence costs. The Supreme Court left it for the High Court to determine this point.

Comment

The Supreme Court's decision is the most significant case concerning liability insurance for many years. It is a welcome result for investors in Bridgecorp and other finance companies, many of whom lost their life savings when the financial company sector collapsed.

Directors will need to ensure that they preserve their ability to seek the payment of their defence costs by taking out separate policies or policies with separate indemnities for defence costs.

Finally, we may not have seen the last of the litigation concerning section 9. Given the Supreme Court's comments that insurers may be liable for both the amount of the statutory charge and defence costs, we expect more litigation to come.

Bell Gully acts for the receivers of Bridgecorp, who were successful in the Supreme Court.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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