Third party rights

The decision of Lang J in the High Court of New Zealand, Auckland District Registry, 15 September 2011, in Steigrad v BSFL 2007 Ltd, strikes a serious blow at the efficacy of D&O cover in New Zealand and also in New South Wales. The decision effectively means that defence costs are irrecoverable by the directors if third party claimants against the directors assert their statutory right to direct recovery from the insurers.

Steigrad: the facts

The case arose from the collapse of the Bridgecorp Group in July 2007, owing investors some NZ$500m. Both civil and criminal proceedings were brought against the directors. The criminal proceedings alleged that the directors had made false statements in prospectuses and other documents, and the civil proceedings, alleging breach of common law and statutory duties by the directors in their management of the group and seeking damages of some NZ$450m, were stayed pending the determination of the criminal proceedings. Bridgecorp companies in Australia had also indicated that they intended to bring civil proceedings. The directors had two relevant policies: a Directors’ and Officers’ liability policy issued by QBE in 1996 and providing indemnity for up to NZ$20m against liability and defence costs; and a separate defence costs policy again issued by QBE, in 2000, covering costs for up to NZ$2m. When the criminal proceedings were initiated it was agreed that the latter policy would respond first. The limits of that policy were reached and exhausted, and the present proceedings concerned the D&O cover. Future estimated defence costs ran to some NZ$3m. The D&O policy defined ‘loss’ as meaning ‘All sums that the Insured Person becomes legally liable to pay on account of all claims made against the Insured Person for any Wrongful Act to which this insurance applies, including but not limited to Defence Costs’. As a result of this wording, the limit of indemnity was inclusive of defence costs. The insurers were obliged to provide an indemnity for defence costs if they consented to costs being incurred, and their consent was not to be unreasonably withheld.