Good news for directors and officers – successful appeal against Bridgecorp decision

An earlier judgment that suggested that directors may be unable to rely on Directors’ and Officers’ (D&O) liability insurance to fund defence costs has been reversed. The overturned decision had effectively prevented directors accessing a single policy, intended to cover both defence costs and claims for damages, where a civil claim (e.g. a class action by shareholders) was held to have first priority over the insurance money.

In a judgment that sends encouraging news to directors, the New Zealand Court of Appeal has stated that section 9 of the Law Reform Act 1936 (New Zealand) (Act) cannot be interpreted to give third party claimants priority over insurance money ahead of a director’s claim to defence costs under a D&O policy with a single indemnity.

Briefly, the judgment reverses the earlier decision on the grounds that section 9 of the Act:

1. cannot be applied to avoid payment of defence costs, even where the cover is combined with third party liability cover and subject to a single limit of liability; and
2. takes effect subject to the terms of the contract of insurance and instead of overriding them, and was never intended to interfere with agreed contractual rights and obligations to provide cover and reimbursement. ‘The purpose of s 9 is not to rewrite the bargain struck between the parties’ (Steigrad v BFSL 2007).

The decisions are relevant to Australia because the New South Wales Law Reform (Miscellaneous Provisions) Act 1946 was modelled on the New Zealand legislation and contains a similar provision. An insurance company operating out of NSW is subject to the NSW legislation, and so how various courts interpret the clause is particularly relevant.

A group of insurers has recently applied to the NSW Court of Appeal to hand down guidance as to how the clause will be interpreted, so the uncertainty created by the Bridgecorp decision in Australia should be resolved soon.

We will continue to follow this matter and communicate any developments as they happen. If you would like help reviewing your policies in the meantime, or require any further information please contact David Grace or Terry Batch.

To read the discussion of the earlier Bridgecorp decision, which has been reversed, please view – NZ High Court Decision Necessitates Urgent Review of Directors’ & Officers’ Insurance Cover.