Australian court decision provides guidance on the Bridgecorp D&O issue

A recent decision by the NSW Court of Appeal concerning parties making claims against directors and officers provides some certainty for directors and insurers with regard to the proceeds of D&O policies.

The Court ruled that parties making a claim cannot assert a statutory charge over the proceeds that would prevent the directors and officers from accessing the policy to fund their defence costs before judgment is handed down.

There has been great uncertainty about the issue since the New Zealand High Court handed down the ‘Bridgecorp’ decision in September 2011, which stated that a provision of the Law Reform Act 1936 (New Zealand) operated to ensure civil claimants had first claim over the insurance monies, and that the directors could not access the insurance funds for defence costs. (See our previous alert on the issue here.)

This initial decision was overturned by the New Zealand Court of Appeal in February 2013. (See previous alert.) The case is currently on appeal to the New Zealand Supreme Court (the highest court in New Zealand). The decisions are relevant to Australia because the New South Wales Law Reform (Miscellaneous Provisions) Act 1946 was modelled on the New Zealand legislation and contains a similar provision.

The clarification was sought in relation to various claims that resulted from the collapse of the Western Australia-based Great Southern managed investment scheme. The underlying litigation has been conducted in Victorian and Western Australian courts. The Court was asked to consider numerous issues, including whether section 6 imposed a charge on insurance money that precluded the payment of defence costs.

The Court decided the matter on the basis that there was insufficient territorial connection to NSW for the legislation to apply, however it also went on to consider how section 6 might operate had the territorial requirements been satisfied.

The Court concluded that the charge under section 6 would not extend to money payable under a policy for defence costs before any judgment or settlement has been decided.

There is nothing on the face of s 6 to suggest that it was intended to alter the contractual rights of the parties in such a radical fashion. If the New South Wales Parliament intended s 6 to have such a drastic effect on the contractual rights of an insured, it could be expected to have provided so in express terms. [124]

While this judgment is not binding, it provides a degree of certainty for insurers, as well as directors and officers, that policies intended to fund costs defending an action may be used to do just that.

If you would like help reviewing your policies, or require any further information please contact David Grace.