Bridgecorp - A Christmas present for Directors from the NZ Court of Appeal
Jan 2013 |Introduction
It is generally accepted that D&O insurance cover needs to be arranged by companies for the protection of its directors and officers, not least to secure the best appointees.
This is because claims against directors and officers often involve substantial damages or financial penalties and significant defence and investigation costs.
In the context of the duties owed under the Corporations Act 2001 (Cth), directors' conduct has come under the increasing scrutiny of regulators (mainly ASIC and APRA) and shareholders. Shareholders' increasing awareness of their ability to make claims against directors and the availability of D&O insurance has given rise to the trend for those claims to be vigorously pursued, particularly in the wake of the GFC and the rising number of insolvencies.
The list of high profile cases has grown since 2000, such as those involving HIH, One.Tel, James Hardie, Fortescue Metals, AWB, Opes Prime, Sons of Gwalia and most recently the Bridgecorp case in New Zealand.
More is being expected of directors at a time when the environment in which they operate is becoming ever more complex, and the number of claims is on the rise.
The scope of cover available under D&O policies and the range of wordings available in the market has therefore been brought into sharp focus, with issues such as stand alone policies or separate towers of insurance for shareholder securities claims ("Side C"), to avoid the erosion of the cover available for directors.
Against the trend of directors' increasing exposure, this newsletter looks at the relief provided by the New Zealand Court of Appeal decision in Steigrad v BFSL 2007 Ltd & Ors,1 commonly known as Bridgecorp, handed down on 20 December 2012.
Background
Receivers of various Bridgecorp companies made claims against its directors for alleged breaches of their duties, with damages estimated in excess of NZ$450 million. The directors were also being prosecuted by the New Zealand equivalent of ASIC. Faced with the prospect of costly litigation, the directors sought access to their D&O policy (which had a NZ$20 million limit) to fund their defence costs.
The receivers sought to enforce a "charge" they said arose over the proceeds of the D&O policy, on the basis the proceeds of the policy should be preserved in order to be payable for compensation ordered in their claim.
Acknowledging the significantly adverse impact on the directors, Lang J in the New Zealand High Court2 (the Court of first instance) found the directors could not access the benefits of their D&O policy because a charge did indeed arise under the applicable legislation,3 which may also be applied to reinsurance.4
Although that case was decided in New Zealand and is based on New Zealand legislation, there is similar legislation in New South Wales which has therefore created a great deal of interest amongst lawyers, insureds, brokers and underwriters in Australia.
As with so called "Side C" cover eroding the limits of cover available to directors, this is another example of the unfortunate consequences that can arise from standard D&O policies affording cover for a range of exposures - here, defence costs and damages - in one policy with a single policy limit.
The Court of Appeal decision
Insurers have moved quickly to address the issue with the provision of separate "stand alone" defence costs cover, to quarantine that cover from any other claim for compensation that may be on foot in the event a charge arises.
As an early Christmas present however, the New Zealand Court of Appeal overturned the first instance decision, finding that section 9 of the Law Reform Act 1936 (NZ) did not preclude the directors' contractual entitlement to cover for defence costs by giving rise to a charge over that entitlement.
The New Zealand Court of Appeal noted that the policy in question provided two distinct aspects of cover for the insured directors, being (firstly) cover for defence costs incurred by the directors and (secondly) cover for liability to a third party, such as the receivers or ASIC.
The Court of Appeal said that whilst the component of cover for third party liability remained contingent on that liability being established, the component of the policy for payment of defence costs had already been triggered. They therefore held the receivers were not entitled to a statutory charge over the proceeds of the policy that were already due and payable in respect of an existing liability of the directors to pay defence costs, as opposed to any liability to pay compensation that had not yet crystallised.
The decision may well now be appealed to the Supreme Court of New Zealand.
Comment
The full impact of the case remains to be seen within Australia.
If the first instance decision was to be followed here or upheld on further appeal in New Zealand, where a D&O policy extends cover for an insured's liability to pay damages and defence costs, depending on the policy and legislative wording, a charge may arise and preclude access to the benefit of the policy.
Even applying the New Zealand Court of Appeal's reasoning, it appears where there are a number of claims for compensation or damages (for example by receivers, shareholders and a regulator) and the response of the policy to each remains contingent, entitlement to cover under the policy for any such potential liability may remain problematic under the applicable legislation in New Zealand and New South Wales.
For the time being however, directors have the comfort of knowing their entitlement to defence costs is preserved.
It should also be noted that should the first instance decision be followed in Australia, it may only apply to policies where the amount claimed against the directors and the anticipated defence costs of the directors exceed the sum insured.
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(1) [2012] NZCA 604.
(2) Steigrad & Ors v BFSL 2007 Ltd & Ors HC AK CIV-2011-404-611 [2011] NZHC 1037.
(3) Section 9 Law Reform Act 1936 (NZ).
(4) Ruscoe v Canterbury Policy Holders HC WN CIV 2011-485-1535 (9 December 2011).
(5) Section 6 Law Reform (Miscellaneous Provisions) Act 1946 (NSW).
