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New Zealand – Bridgecorp: More Kiwi Magic.

7 May, 2014

 

 

From the perspective of a practitioner in the United States, the Bridgecorp decision is shocking because the obligation to pay defense costs under a D&O or E&O policy is paramount under any US insurance law. It is unfathomable that an insured’s contractual entitlement to defense costs could be impaired by a judicial interpretation of a statutory restriction that arguably was designed to address the separate right to indemnity. This interpretation is even more difficult to understand when it is undisputed that the legislative history surrounding the statute focused on workers’ compensation claims, not claims under a D&O or E&O policy. And, last but not least, this outcome is startling because it allows a charge on the entire policy limit before the claimant has obtained a favourable judgment. 


The Bridgecorp opinion:

 

  • Gives claimants greater priority to the policy proceeds than to the insureds who purchased the policies
  • Gives greater priority to a potential indemnity obligation than to an immediate, actual defense obligation
  • Assumes that both the merits and the quantum of the claim are valid, even though neither has been adjudicated
  • Essentially operates as a temporary restraining order freezing one of the insureds’ major assets, the policy 
  • Shifts the litigation advantage to claimants by potentially depriving the defendants of the ability to fund the defense
  • Distorts the “loser pays” rule by giving greater weight to the possibility the defendant will lose the case than the possibility the defendant will prevail
  • Enlarges the potential source of recovery to claimants, encouraging the prosecution of questionable or inflated claims

The practical effect of the Bridgecorp opinion is that an insurer can refuse to pay defense costs intended to becovered by the policy that was purchased. Of course, if the insured lacks the financial ability to mount a meaningful defense, then the Bridgecorp opinion becomes a self-fulfilling prophecy in that it makes the claimant more likely to prevail. To add insult to injury, the insured defendant, already stripped of coverage for defense costs, would then be responsible for the claimant’s fees under the loser pays rule.


In the alternative, the insurer can pay defense costs, running the risk that the policy has been reformed by judicial fiat into a “defense costs in addition to limits” policy.


Assuming there is no further judicial recourse, it appears the only other option is through legislative means. In the interim, insurers and brokers should consider developing insurance products that address this unfortunate outcome such as, for example, policies providing defense costs only, policies which provide a specified sub-limit for defense costs, or policies which provide defense costs in addition to limits. However, policies which provide defense costs in addition to limits pose particular problems for insurers, particularly in the context of multiple claims. This potential solution comes with other risks which are beyond the scope of this commentary. 


Regrettably, in the short term, the Bridgecorp opinion encourages insurers not to pay defense costs. This, ironically, allows the insurer to put its interests ahead of the interests of the insured with impunity, standing basic insurance law on its head.

 

Clyde & Co

 

For further information, please contact:

 

Kim West, Partner, Clyde & Co

kim.west@clydeco.us

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