Is it Worth Looking Again at the Case for “Defence Costs In Addition”?

Money Grab

You might think your worst nightmare as a director is to find yourself personally sued and embroiled in a heavyweight, high value and expensive piece of commercial litigation involving your company.  That’s why you buy D&O insurance – right?

But what if you find the dials on what first seemed a very generous seven-digit sum insured whirring at such an alarming speed on legal fees that questions are  raised as to how much will remain to fund any judgment or settlement involving you? What if those questions are being raised not just by you (and your legal team) but by the claimants too?

Using Insurance Cover for Legal Fees

It’s now almost exactly a year since the New Zealand Court of Appeal overturned the first instance decision in the Bridgecorp case in which precisely this issue arose under legislation specific to New Zealand.  In other countries such as Israel it has long been the law that in order to protect claimants, insured defendants much purchase “costs in addition” liability policies.

The result of the appeal in Bridgecorp was that the defendant directors were allowed to continue to burn through their insurance cover by spending on  legal fees rather than being required to ring-fence their insurance limit to satisfy any judgment which might ultimately be entered against them. But the question as to the wisdom of this approach and as to adequacy of any aggregate limit shared between a large group of insured persons is still worth asking.

Tell the Claimants?

One tactic which defendant directors, faced with a fast diminishing limit of cover, can employ is to go “open kimono” to the claimants and disclose to them the uncomfortable truth that there won’t be much left in the pot to satisfy any judgment.

Of course that carries risk. It may be that the claimants will posture (or really mean it when they say) that they intend to pursue a scorched earth policy and go after the individual’s personal assets regardless of insurance cover—hardly a recipe for sleeping easily at night!

A recent case in the UK (albeit not a  D&O case) shows that even where the defendant does not go down that route and indeed refuses to disclose insurance limits, he or she may be required to do so by the court. The case of  XYZ v Various [2013] EWHC 3643 involved a group litigation order against various companies running private hospitals that supplied defective breast implants manufactured by the French company PIP. At an interim pre-trial hearing the issue before the Court was whether it had the power, at the request of the claimants, to “provide information to them as to the nature and extent of its liability insurance cover in respect of its potential liability in these proceedings…”

The claimants in XYZ were concerned about Transform’s ability to continue to participate in the litigation if insurance cover for that participation (and satisfaction of any judgment) was not confirmed. The court proceeded on the basis that it accepted that Transform might not be able to fund the litigation to the conclusion of the trial. The court also agreed that if that were the case, this would have a substantial impact on future proceedings were it later to transpire that Transform was financially incapable. As the judge put it:

If Transform has adequate insurance then there is no need for concern. If they do not then the directions and timetable which have been fashioned with care and after significant expense are in jeopardy.

The provision of the civil procedure rules on which the claimants relied was the general power granted to the court to manage a case in furtherance of the overriding objective to deal with cases justly and at proportionate cost.

Having looked at the relevant rules and the corresponding case law the judge concluded that:

… Whether or not Transform can fund this litigation to trial (and any appeal) does affect case management…. I remind myself that dealing with a case justly includes allotting to it an appropriate share of the court’s resources. Were I to revise the directions now and it later transpired that Transform had been adequately insured all along, the litigation would plainly have consumed (indeed wasted) more than its appropriate share of the court’s resources for no good reason…. I am satisfied that gives me the power to order Transform to provide to the court a witness statement (or statements) setting out whether Transform has insurance adequate to fund its participation in this litigation to the completion of the trial and the conclusion of any appeal…. I am sure that is also in accordance with the overriding objective. It gives no unfair advantage to the claimants. There is no prejudice to Transform. The result will be that the court retains control over the use of its resources in this litigation.

So there you have it. In the court’s view the disclosure of insurance limits does not prejudice the defendant and, even to the extent it may, any such prejudice looks unlikely to outweigh the overriding objective of dealing with cases “at proportionate cost.”

If a defendant director were unlucky enough to be placed in this position, and had a separate “defence costs in addition” limit, it just might be enough to dissuade a court from requiring him or her to disclose the full limit unless and until strategically it made sense to do so. Whether D&O insurers would be prepared to step up to the plate to deliver that solution across the board and, if so, at what prices remains to be seen.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers

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