Company
directors everywhere are urgently renegotiating terms of their liability
insurance following Supreme Court rulings in the Bridgecorp and Feltex cases
which froze insurance cover for directors’ legal defence costs.
The court said Bridgecorp
and Feltex directors had struck a poor bargain; insurance policy wording had
the effect of giving any potential payout to investors priority over defence
costs incurred in challenging those claims.
It is common for
directors of substantial businesses to take insurance cover for any personal
liability they may incur acting as director.
Insurance companies offer policies on standard terms: commonly called
directors’ and officers’ (D&O) insurance.
This standard wording was under scrutiny after the collapses of both
Bridgecorp and Feltex.
Receivers of failed
finance company Bridgecorp are suing its directors for in excess of $340
million. The directors have insurance cover
totalling $20 million with QBE Insurance.
Investors in the $250
million 2004 Feltex float are suing those who were directors in May 2004 for
some $180 million. These directors have insurance cover with AIG
Insurance to a total of $50 million.
Both QBE and AIG were
advised of the claims and notice was given of a charge against the D&O policies. The Law Reform Act 1936 allows a claim
directly against an insurance policy where the person being sued is
insured. If a claim is successful, the insurance
payout goes directly to the person injured.
The Bridgecorp and
Feltex D&O policies covered directors both for legal claims against them
and for their legal costs in defending these claims. The Bridgecorp and Feltex directors said they
were entitled to recover their actual defence costs under their policy before
any payments to a successful litigant. The court disagreed. Where a D&O policy gave combined cover
for legal claims and defence costs, payment for legal claims took
priority. Directors could not deplete
the insurance money available by dipping into the fund first to pay their legal
defence costs.
The court ruling means
Bridgecorp and Feltex directors have to finance their defence costs from their
own resources and can recover under their D&O policies only after any
successful claim has first been paid. In
both cases, each insurer is only liable to pay up to the agreed limit of the
insurance.
BFSL
2007 Ltd v. Steigrad & Houghton v. AIG – Supreme Court (23.12.13)
14.003