One of the primary purposes for which policyholders
purchase D&O insurance is to provide directors and officers with defense
cost protection in the event claims are made against them. However, a September
15, 2011 decision by a justice of the New Zealand High Court in Auckland (here) found
that former directors of the defunct Bridgecorp companies are not entitled to
advancement under the companies' D&O insurance policies of the costs of
their criminal defense where the companies' liquidators and receivers have
raised (but not yet proven or even filed) claims against them exceeding the
policy's limits of liability.
Though the decision reflects a peculiar feature of New
Zealand law, it nevertheless may have some noteworthy implications,
particularly in light of the larger D&O insurance industry's ongoing
efforts to develop insurance solutions that operate globally and respond
The Bridgecorp group operated as a real estate
development and investment firm. (For more information about the Bridgecorp
group and its demise, refer here.) When it
collapsed in July 2007, the group owed investors nearly NZ$500 million. The
group's former directors face numerous criminal and civil claims arising out of
the collapse. Trial on the criminal charges was to take place this fall. The
accompanying civil charges have been stayed pending the outcome of the criminal
Separately, the liquidators and receivers for the
Bridgecorp group companies have advised the directors that they intend to
initiate civil proceedings against them, alleging that the directors breached
their statutory and common law duties, and seeking an order requiring the
directors to pay more than NZ$450 million.
At the time of its collapse, the Bridgecorp group carried
NZ$20 million in D&O Insurance. The group also carried $2 million of
statutory liability defense cost protection (the "SL policy"), but the limits
of the SL policy have already been exhausted in payment of the directors'
attorneys' fees. The directors now seek to have the D&O insurance fund
their continuing criminal defense, which they estimate will amount to NZ$3
million through trial, exclusive of any post-trial proceedings.
The Bridgecorp group liquidators and receivers advised
the group's D&O insurer that they assert a "charge" under Section
9 of the Law
Reform Act of 1936, which they contend creates a priority entitlement
in claimants' favor over monies that may be payable under any insurance policy
held by the person against whom the claim is made. The Bridgecorp group
directors in turn initiated an action seeking a judicial declaration that
Section 9 does not prevent the insurer from meeting its contractual obligation
under the D&O policy to reimburse them for their defense costs.
The September 15 Ruling
On September 15, 2011, New Zealand High Court (Auckland
Registry) Justice Graham
Lang ruled in favor of the Bridgecorp group's liquidators and receivers,
ruling that the receivers' and liquidators' "charge" on the D&O insurance
policy's limits of liability under Section 9 "prevents the directors from
having access to the D&O policy to meet their defence costs."
Section 9 (which is set out verbatim in paragraph 19 of
Justice Lang's opinion) arises out of the personal injury context and gives the
claimant a "charge" over liability insurance policy proceeds as of the date the
claimant's injury arose. As Justice Lang stated, the provision provides a
"procedural mechanism" to ensure that a claimant can "gain direct access to
insurance monies that would have been available to the insured."
Justice Lang acknowledged that the Bridgecorp group's receivers'
and liquidators' "charge" on the D&O policy's proceeds is "conditional"
upon the need for the prospective claimants' ability to establish that the
directors are liable, as well as upon the need for the directors or the
claimants to establish that the directors are entitled to coverage under the
Notwithstanding the fact that the receivers and
liquidators claim on the policy proceeds is merely "conditional," Justice Lang
nevertheless held that it operated to bar the payment of the directors'
immediate criminal defense expenses. Justice Lang reasoned that because the
receivers and liquidators claims are "for a sum significantly greater than the
amount of cover available under the D&O policy," the insurer is "bound to
keep the insurance fund intact."
Though the result might be different where the amount
claimed is less than the limit of liability, where as here the amount of the
claims exceed the limits of liability, any payments the insurer makes "must be
for the purposes of satisfying any liability the directors may have to civil
claimants," to the point that if the insurer were to pay any defense costs, it
"would be liable to restore the amount of any such payment to the pool of money
available under the policy" in order to meet the claims of any claimants.
Justice Lang acknowledged that this result "may be harsh"
for the directors, produces some "unsatisfactory consequences," and may "seem
unfair." But he nevertheless reasoned that this result was "clearly in
accordance with the object and purpose of [section] 9." He added that the
outcome was "partly the result of the fact that the Bridgecorp companies
elected to take out an insurance policy that provided cover for both defence
costs and claims for damages and compensation," and is a "direct consequence of
the statutory regime the Act introduced nearly 80 years ago."
At one level, this decision represents nothing more that
the application of a peculiar feature of New Zealand statutory law. Moreover,
informed sources advise me that the decision in under appeal, so it may or may
not stand even within its own jurisdiction.
But at another level, this decision does raise some
noteworthy implications of wider significance. The first and foremost is that
it shows the significant danger that both policyholders and insurers may face
with respect to the scope of D&O insurance coverage available around the
world in the many jurisdictions where the interpretive case law is as yet
The threat of D&O claims throughout the world has
expanded significantly in recent years, and with this increased exposure the
potential significance of D&O insurance protection has also grown. Global
companies increasingly seek to put in place D&O insurance protection
applicable in the various countries in which they operate. But as this decision
shows, D&O insureds facing claims in jurisdictions where the interpretive
case law is undeveloped may not always know how the local courts will interpret
and apply their policy.
One possible solution to this concern might be the
inclusion in the D&O insurance policy of a choice of law provision designed
to ensure that the policy will be interpreted according to the laws of
jurisdictions where the coverage interpretations are more developed and
therefore more predictable. Of course, this solution may be dependent upon the
willingness of the court's in the forum jurisdiction to recognize and apply the
choice of law provision as written, as well as the apply the specified law
according to expectations and assumptions. (Refer here
for more thoughts about the potential need for choice of law provisions in
D&O insurance policies.)
As Justice Lang himself acknowledged, there is something
particularly "unsatisfying" about an outcome where the mere inchoate and as yet
unfiled claim of a prospective claimant can take priority over the insured
persons' immediate need for criminal defense cost protection under the policy,
particularly where, as Justice Lang also acknowledged "the Bridgecorp companies
took the policy out at least in part for that specific purpose."
In that regard, it is worth noting that this policy does
not appear to contain so-called "entity coverage" (see paragraph 14 of the
opinion). Accordingly, this policy clearly was intended solely for the
protection of the insured directors and officers. Yet even though the policy
for the individual insureds' protection, Justice Lang's interpretations of
Section 9 subordinates the insureds' immediate entitlement to the policy
proceeds to the mere unproven claims of prospective claimants. The consequences
of this topsy-turvy inversion is not just "harsh," but grotesque as it leaves
these individuals facing serious criminal charges without the very protection
the insurance was designed to provide.
Justice Lang acknowledge that this result might not apply
where the amount of the claims do not exceed the D&O insurance policy's
limits of liability, which would seem to suggest even more perversely that the
more serious the claims against the directors and officers, the less likely
they are to be able to rely on the defense protection under their D&O
The solution for the protection of corporate directors
and officers in New Zealand would seem to be to separate out their defense cost
coverage from the liability protection under their D&O insurance policy. If
the Bridgecorp case is affirmed on appeal, it would seem that the New Zealand
D&O insurance marketplace will have to evolve to provide a policy that
avoids that pitfalls that this case presents -- or seek to have Section 9
amended to recognize the need for corporate defendants to be able to rely on
their D&O insurance to defend themselves.
One other possible solution to the problem presented by
this case is to arrange for defense costs to be outside the limits of liabilty
(that is, to structure the policy so that defense expenses do not erode the
limit of liability). Although D&O insurance typically is not
structured that way, it sometime is --- indeed, if I am not mistaken,
in Quebec it is required by applicable regulations that defense
costs must be outside the limits of D&O insurance policies.
One thing this decision shows is how early the D&O
insurance industry is in the process of trying to provide comprehensive global
D&O insurance policies that will operate predictably in the various
jurisdictions in which it may be applied. The D&O insurance industry has
been working hard in recent years to develop policies that will operate
globally and respond locally. The Bridgecorp decision underscores the
significant challenge that the industry faces in trying to ensure that D&O
insurance will predictably be available at the local level, particularly in
jurisdictions where the coverage interpretations are as yet undeveloped.
Perhaps it is owing to its antipodal provenance, but it
seems to me that Section 9 (at least as interpreted by Justice Lang) stands the
very idea of liability insurance on its head. Liability insurance does not
exist to protect claimants, it exists to protect the insureds.
Insurance buyers procure the insurance to protect themselves from third party
lawsuits. The very idea that a mere assertion of a prospective claim, no matter
how spurious, is enough to strip the insured under a liabiltiy policy of
the proection they procured for themselves is questionable in its very approach
to teh insurance equation. I hope that the appellate court (or if
necessary the New Zealand Parliament) will give due consideration to the
nature and purposes of liabiltiy insurance and vacate the ruling of this case.
An October 4, 2011 memorandum about the Bridgecorp
decision from the Minter Ellison Rudd Watts law firm can be found here.
An October 2011 Bulletin from Willis New Zealand about the decision can be
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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