NZ High Court cecision necessitates urgent review of Directors’ & Officers’ insurance cover

A recent ruling in New Zealand has cast doubt on the extent to which directors can rely on their Directors’ and Officers’ (D&O) liability insurance cover to help fund defence costs. The decision is relevant to all directors of companies who have a single policy covering both defence costs and claims for damages.

The case related to the collapse of the Bridgecorp companies in July 2007, which left 14,300 investors out of pocket by $459 million. The New Zealand corporate regulator is currently pursuing criminal charges against the company directors, and the directors, having exhausted the sum of $2 million available to them under the directors’ statutory liability policy, sought to access Bridgecorp’s $20 million D&O policy to fund their defence costs for a further $3 million. However the Bridgecorp receivers told the D&O insurers that they intend to bring civil proceedings against the directors, and that they have first claim over the insurance monies because of a provision of the Law Reform Act 1936 (New Zealand). The New Zealand High Court agreed, and ruled that the directors could not access the insurance funds.

The effect of the clause is that if a civil claim that exceeds the policy limit has been, or will be made, then directors cannot rely on the policy to pay defence costs even if the civil claim has not yet been filed, or the chances of success are not clear. This is because the charge gives the civil claim priority over the director’s entitlement to claim defence costs against the policy.

This decision potentially affects many Australian company directors because the New South Wales Law Reform (Miscellaneous Provisions) Act 1946 was modelled on the New Zealand legislation and contains a similar provision, with equivalent legislation in Northern Territory and Australian Capital Territory. There is no equivalent provision in Queensland and neither does there appear to be in Victoria.

All company directors are potentially at risk because the law of New South Wales may apply when interpreting the insurance policy. This is because many insurance policies are issued by insurers carrying on business in New South Wales, and the laws of that State will usually apply.

While there may be argument in the future, in respect of a company in liquidation that operated wholly in Queensland and the liquidator of which is in Queensland, but where the law of New South Wales applies to an insurer carrying on a business there, the imposition of a charge may be difficult to avoid where the law is designed to protect creditors from losing the benefit of the insurance monies owed by an insurer carrying on business in that State.

Given the limiting of directors’ rights under the D&O policy, it may be considered imprudent by the directors of companies insured with a New South Wales insurer to take the risk that a court will not apply the charge provisions.

We strongly suggest that all companies and directors review their current D&O policies to see if they are at risk.

For help reviewing your policies or for further information please contact David Grace +61 7 3231 2421, Kevin Bartlett +61 7 3231 2496 or Terry Batch +61 7 3231 2921.

Authored by David Grace and Anna Richmond.