On 23 December 2013, the Supreme Court of New Zealand handed down its decision on the appeal in the Bridgecorp case. By a majority of 3:2, New Zealand’s highest court allowed the appeal made by the receivers of the Bridgecorp group of companies.

The Supreme Court was asked to consider whether the statutory charge provided for under section 9 of the Law Reform Act 1936 prevented payments being made under the insurance policy for defence costs before liability is decided by way of settlement or judgment, where to do so would deplete the sum available to meet any ultimate liability to a third party liability.

The appellants argued that defence costs should not be paid under the policy if to do so would deplete the funds available to meet the directors’ liability as eventually established in the relevant proceedings. This was the position accepted by the court at first instance.

The respondents contended that the statutory charge remained contingent until liability was established. Until then, they argued, the payments for defence costs could be made as they fall due under the policies. This position was held to be correct by the New Zealand Court of Appeal.¹

The majority of the Supreme Court (Elias CJ and Glazebrook and Anderson JJ) allowed the appeal and held that the statutory charge under section 9(1) secured the full amount of the eventual liability to a third party claimant and arises immediately on the occurrence of the event giving rise to the claim. Therefore reimbursement to the directors for their defence costs until such time as any ultimate liability was decided on could not be within the ambit of the statutory charge.²

This leaves New Zealand insurers in the position that, where a third party claim (of which the insurer has notice and which exceeds the policy limit) remains outstanding, the payment of defence cost under the policy could be ex gratia or in excess of policy limits. The New Zealand insurer is therefore in a predicament. Does it:

• advance defence costs in a bid to ensure appropriate legal representation at trial but run the risk of paying additional sums over policy limits if any defence is ultimately unsuccessful; or
• refuse to advance defence costs by reason of the charge asserted and run the risk that the insured is inadequately represented at trial?

Whilst McGrath and Gault JJ agreed with the majority that the charge under section 9 descends at the time of the event giving rise to the claim, they diverged from the majority’s conclusion that the charge secured the full amount of the eventual liability of the insured. The dissenting judges considered that such view hindered the ability of the insured and insurer to defend third party claims.

Australian Implications

We suggested that the NSW Court of Appeal decision in Chubb v Moore³ (which dealt with almost identical provisions under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW)) had gone a long way to resolving uncertainty about the law in this area not only in relation to D&O policies, but all insurance policies where the limit of cover is not costs inclusive.

There is now a clear divergence between the NSW Court of Appeal and the New Zealand Supreme Court. An application for leave to appeal to the High Court of Australia has been filed and we will report further on that.

End Notes:

1 Steigrad & Ors v BFSL 2007 Limited [2012] NZCA 604

2 BFSL 2007 Limited & ors (in liquidation), Bridgecorp Limited & Bridgecorp Management Services Ltd (both in receivership and liquidation) v Peter David Steigrad

3 Chubb Insurance Company of Australia Ltd v Moore [2013] NSWCA 212

For further information, please contact:

Jenni Priestley, Partner, Clyde & Co
[email protected]