23 December 2013

D&O insurance: BFSL 2007 Ltd v. Steigrad & Houghton v. AIG

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