A decision in the NZ High Court prompts a need to review of Directors’ & Officers’ Insurance Coverages

This decision relates to the collapse of the Bridgecorp companies back in July 2007. It left almost 14,300 investors out of pocket by around $460 million. The New Zealand corporate regulator is currently seeking criminal charges against their company directors. As the directors had already used up the sum of $2 million available to them under a directors’ statutory liability policy, they then sought to access Bridgecorp’s other policy. This was a Directors & Officers Liability policy with a sum insured of $20,000,000. They wanted to fund further defence costs estimated at $3 million out of it.

However the Bridgecorp receivers had already told the D&O insurers that they intend to bring civil proceedings against the directors, and that they have first claim over the insurance. It was because of a provision in the Law Reform Act 1936 (New Zealand).

The New Zealand High Court agreed, and ruled that the directors could not access the insurance funds. This affects States such as New South Wales, Northern Territory and the Australian Capital Territory but not Queensland and Victoria. In New South Wales, the relevant act is the Law Reform (Miscellaneous Provisions) Act 1946 which was based on the New Zealand legislation and contains a similar provision. There is equivalent legislation in Northern Territory and Australian Capital Territory..

All company directors could potentially be prejudiced because the law of New South Wales may apply when interpreting their insurance policy. This is because many insurance policies are issued by insurers carrying on business in New South Wales. The laws of that State will usually apply. This is despite the fact that the policy refers to jurisdiction within all of the Commonwealth of Australia jurisdiction.

There may be an argument in the future where a company is in liquidation and operates only in Queensland and even the liquidator is from Queensland, but the law of New South Wales applies because their insurer carries on a business there. This law may be difficult to avoid as it is designed to protect creditors from losing the benefit of the insurance monies owed by an insurer carrying on business in that State. However we really do not know if this same precedent will be followed here.

It may instead be considered better for the directors of companies who are currently insured with a New South Wales insurer to not take the risk that a court will apply this State‚Äôs laws, and shift to an Insurer based elsewhere given the limiting of directors’ rights under the D&O policy. It may be better for the Insurers instead to issue their policy from another State.

In either situation, it is worth trying to fix this potential issue.

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