The New Zealand Court of Appeal has just (on 20th December) handed down a long awaited judgment in the Bridgecorp case (and in another case on similar facts involving the insolvency of Feltex). The decision is very significant since it restores and recognises the sanctity of the insureds’ contractual rights to receive payment of defence costs under a (properly drafted) D&O contract pending the crystallisation of any damages award against them.
As reported in my blog last November, Bridgecorp collapsed in 2007 owing investors nearly NZD 500 million. The defendant directors had the benefit of a D&O policy with a limit of NZD 20 million. The directors estimated that they would require approximately NZD 3 million of this limit by way of defence costs through to the end of trial. They also faced the prospect of future civil proceedings for many millions of NZ$.
The liquidators of Bridgecorp went to court in New Zealand in an attempt to prevent the directors who were facing these proceedings from depleting available insurance funds by way of defence costs. They relied on Section 9 of the New Zealand Law Reform Act 1936, which stipulates that insurance funds under a liability policy must be made available to creditors if the court rules in their favour. The issue was whether this provision in effect prevented the directors from accessing the policy until after the final judgment. The judge concluded that the liquidators were entitled to an order freezing the proceeds of the D&O policy.
Court Reverses Freezing Order
The Court of Appeal has just reversed this decision. It has done so on the ground that the clear intention behind the D&O policies in question was to create two quite separate rights to indemnity, albeit bound together in a single policy and subject to a single aggregate limit, namely:
- The right to an indemnity in respect of defence costs
- The separate right to indemnity in respect of judgments and settlements
On that basis it would be wrong (and was never within the contemplation of the New Zealand Legislature in drafting Section 9) to impair the first right with restrictions in relation to the second right. As the Court expressed it:
The short but decisive point is that in terms of s 9 the “… contract of insurance by which [Mr Steigrad] is indemnified …” is against both (a) his “liability to pay any damages or compensation …” and (b) his liability to pay defence costs.
The Court was invited by the liquidators of Bridgecorp to consider the risk that an effect of their decision might be to exhaust any funds available ultimately to pay the creditors of Bridgecorp if they succeeded in obtaining judgement. The Court reached a robust conclusion on this submission in the following terms:
It is irrelevant in this context that the funds available to meet Bridgecorp’s claim against Mr Steigrad will be progressively depleted by performance of QBE’s contractual obligation to reimburse Mr Steigrad for his defence costs. That is the necessary consequence of the policy’s structure in providing for the one sum insured to be available to meet claims for indemnity for two separate liabilities, consistently with the contractual contemplation that by incurring defence costs the insurer may avoid its contingent liability to Bridgecorp. And it would always be open for the parties to strike a compromise on terms designed to ensure that the sum insured is not further exhausted by defence costs
Phew! (With Caveats)
A lot of directors (to say nothing of their insurers who potentially face payments in excess of insurance limits) will be heaving collective sighs of relief.
That said, it should be recognised that the decision only relates specifically to the New Zealand legislation and not necessarily to similar provisions in other jurisdictions (most notably Australia) where nonetheless it will carry persuasive weight.
It should also be noted that the Court was looking at specific (albeit fairly typical) policy language. It would be entirely possible to create (whether unwittingly or otherwise) a D&O policy containing a single indivisible right to indemnity in which the defence costs entitlement is contingent on a legal liability in the first place.
As always the policy language matters.