Bridgecorp appeal allowed

Insurance eBulletin - 20 December 2012

Summary

The New Zealand Court of Appeal today allowed the appeal in Steigrad v BFSL 2007 & Ors, overruling a decision of the New Zealand High Court that a statutory charge created on insurance monies under the New Zealand equivalent of s6 Law Reform (Miscellaneous Provisions) Act 1946 (NSW) takes priority over all payments under the policy.

 

 

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Decision

The New Zealand Court of Appeal today allowed the appeal in Steigrad v BFSL 2007 & Ors, overruling a decision of the New Zealand High Court that a statutory charge created on insurance monies under the New Zealand equivalent of s6 Law Reform (Miscellaneous Provisions) Act 1946 (NSW) takes priority over all payments under the policy.

The High Court's decision effectively rendered Defence Costs advanced to the directors of companies within the Bridgecorp group secondary to the statutory charge, and meant that any payments in respect of such costs were potentially ex gratia and, therefore, did not erode the limit of liability available under the D&O policy.

The Court of Appeal ruled that the relevant provision, s9 Law Reform Act 1936 (NZ), did not create a charge in favour of a third party on insurance monies payable in respect of a director's Defence Costs, even where cover for those costs was combined with third party liability cover and was subject to a single limit of liability under the policy.

This was because the policy provided the director with cover for two distinct losses: a) the payment of damages to third parties and b) Defence Costs. Subject to conditions of reasonableness, the right to Defence Costs was absolute and s9 was not intended to "rewrite the bargain struck between the parties."

Most significantly, the Court made clear that the charge was not over the entire policy proceeds, but rather the balance available after advancement of Defence Costs.

It is also important that the Court found that, at least in this case, the charge did not crystallise until the insurer became legally liable to meet damages or compensation after determination not only of liability at law, but also under the policy.

Comment

This is a significant decision which, if followed in Australia, will not only provide comfort to company directors about the pool available for advance Defence Costs, but also to D&O insurers for whom the NZ High Court decision created a great deal of concern and uncertainty about whether they could properly pay Defence Costs.

At least one case is pending before the Supreme Court of New South Wales which ought to determine the Australian position. The Court of Appeal's decision will no doubt be persuasive.

Author

Kate Clark, Special Counsel

 

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