Steigrad v BFSL (Bridgecorp financial collapse) (Bridgecorp) NZHC 1037 (15 September 2011) Lang J
This decision has relevance to liability policies justiciable according to the law of New South Wales where the limit of indemnity includes defence costs.
The case involves New Zealand provisions identical to section 6 Law Reform (Miscellaneous Provisions) Act 1946 which permits the court to declare a charge on liability insurance moneys where the insured has died, become insolvent, bankrupt or in the case of a corporation, wound up.
The provisions have been commonly used in circumstances where the insured’s potential liability far exceeds the likely solvency of the insured, which is the situation in Steigrad.
The charge prevents the insurer from disgorging further moneys under the policy contrary to the charge while the charge is in place.
A few jurisdictions contain a similar provision. New Zealand is one of those jurisdictions. The statutory provisions in Australia were modelled on the New Zealand provisions.
The declaration of charge in Steigrad arose from the collapse of the Bridgecorp Group. At the time of its collapse it owed investors $500 million. The directors have become exposed to claims for compensation arising out of their management of the affairs of the corporation. The value of the civil claims against the directors exceeds the limit of indemnity under the directors’ D&O policy by a factor of 22.
The limit of indemnity under the directors’ policy includes defence costs.
The insurers agreed to advance up to $500,000 towards defence costs, but, the insurer was permitted to advance a greater sum.
The directors required access to the policy in order to respond to the future claims against them. The defence costs which the directors were likely to incur if they were represented in a meaningful way was likely to exceed $3 million.
The court was asked to decide whether if it declared a charge in favour of the claimants, the insurers were permitted to make advances as to defence costs.
The court decided that while ever the charge was in place the insurers were prevented from advancing defence costs under the policy.
While the case is proceeding on appeal its result and its reasoning, if followed in New South Wales will create commercial difficulties for insureds and insurers in responding to catastrophic financial loss claims.
Either insurers will have to look into funding defence costs outside the walls of the insurance policy or their insureds going under or unrepresented in the compensation proceedings.
For the buyers and sellers of liability insurances and directors’ and officers’ policies in particular, the case presents some risks which will need to be managed:
- Insureds if aware of Steigrad’s case may prefer to only purchase policies where defence costs are in addition to the limit of indemnity;
- Brokers will need to be mindful of the risks to them in selling D & O policies where the limit of indemnity includes defence costs;
- Insurers may have to consider the development of insurances which say that some or all of the defence costs are in addition to the limits of indemnity.
For some insurers there may be a silver lining. The potential existence of a charge may compel the early development of strategies for resolution.
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