Steigrad v BFSL 2007 Ltd
Most Directors and Officers (D&O) liability insurance policies cover liability to pay compensation and damages and also defence costs. Surprisingly, the High Court has held that such policies may not, in fact, cover defence costs where a statutory charge for more than the sum insured is asserted under section 9 of the Law Reform Act 1936 (the Act).
The plaintiffs, a group of former Bridgecorp directors, face criminal and civil claims brought by the Securities Commission arising out of the collapse of the Bridgecorp group in 2007. Some Bridgecorp companies have also foreshadowed civil claims for more than $450million based on the directors’ management of those companies.
After exhausting defence costs under a Statutory Liability policy, the directors looked to their $20 million D&O insurance policy to finance continuing defence costs.
The D&O policy covered certain losses, loss being all sums the directors become legally liable to pay on account of claims for any wrongful act … including, but not limited to, defence costs.
The Bridgecorp companies asserted a section 9 charge over the D&O policy insurance monies under section 9 of the Act in anticipation of their claim. The insurer, QBE Insurance (International) Ltd, declined to fund the directors’ defence costs until allocation of the funds was agreed with the companies.
The directors sought a declaration that section 9 does not prevent QBE paying defence costs. The companies countered that if not, defence cost cover was limited to $500,000 based on the Progress Payment of Defence Costs clause which applies where QBE has not confirmed cover.
Examining the purpose of a section 9 charge and whether it prevents the directors accessing the D&O insurance monies to pay ongoing defence costs, Justice Lang held that:
- Claimants often assert a section 9 charge if the insured is insolvent. It allows third party claimants access to insurance moneys that the insured would otherwise have used to meet its claim (and protects that money from other creditors).
- The charge automatically arises when the event giving rise to the claim happens, not when the cause of action arises or when liability is proven.
- The charge arises even before the insured has established a valid claim for cover and before the insurer agrees to indemnify the insured.
- If the insurer can decline the insured’s claim for indemnity, no charge will exist. Therefore, it’s a conditional charge.
- The charge only extends to the amount of the foreshadowed claim. Where the sum insured is less than the foreshadowed claim (as here), the entire sum insured is subject to the section 9 charge.
- Payment of defence costs by an insurer should not reduce the total pool of funds payable under a D&O policy where a section 9 charge exists.
Justice Lang ultimately found that the section 9 charge prevented the directors from accessing the D&O policy to meet their defence costs.
This decision has significant implications, not just for D&O policyholders, but all liability policyholders where defence costs are covered, particularly when included in the sum insured.
It’s conceivable that claimants could overstate their claims when asserting a section 9 charge as a tactic to deprive defendants of access to defence costs. Frequently, where a claim has little merit, defence costs are a defendant’s main exposure.
Existing Statutory Liability policies will not ordinarily cover defence costs for civil claims (for example, in negligence), so will be of limited assistance.
Liability policies with a separate defence cost sublimit may protect those costs from a section 9 charge. Adopting this approach is not without risk, given the broad language of section 9, in that the charge applies to all insurance money ‘that is or may become payable in respect of that liability’. Due to his primary finding, Justice Lang did not need to consider the effect of the Progress Payment Defence Cost Sublimit, so this proposition is untested.
The insurance market is exploring separate defence cost policies to protect those costs from section 9 charges. It’s recommended you speak with your broker if you have a D&O, Professional Indemnity, indeed any kind of liability policy which covers your defence costs.