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Appeal Court overturns controversial liability insurance decision

20 December 2012

​Directors can take comfort from the Court of Appeal decision today overturning the High Court’s controversial interpretation of section 9 of the Law Reform Act 1936 in Steigrad & Ors v BFSL 2007 Limited & Ors.1

The effect of the High Court decision was to cast doubt on the extent to which directors and officers could rely on their insurance cover to help pay for defence costs on criminal and civil proceedings.  See Chapman Tripp’s commentary here.

Steigrad concerned a directors’ and officers’ liability policy to the former directors of Bridgecorp, who were facing criminal charges brought by the Financial Markets Authority. 

The High Court held that, for policies containing an aggregate limit for both defence costs and liability, section 9 of the Law Reform Act 1936 prevented defence costs being advanced to the insured where the third party’s claim against the insured exceeded the policy limit.

This judgment effectively prevented insurers from paying defence costs if they formed part of the overall limit of the insurer's indemnity obligation.  The Court of Appeal’s judgment returns the position to where it was in September 2011.2

The Court of Appeal held that a section 9 charge does not apply to a contractual obligation to pay defence costs.  There is no entitlement to a statutory charge over insurance money lawfully payable in respect of defence costs, as opposed to a contingent liability for damages or compensation.  The two distinct liabilities can be met from a single, aggregated fund.

A more detailed analysis of the judgment and its effect will follow in the New Year.

Our thanks to Gemma Peachey for writing this advisory note. For further information, please contact the lawyers featured.

Footnotes

  1. Steigrad & Ors v BFSL 2007 Limited & Ors, HC Auckland, CIV-2011-404-611, 15 September 2011
  2. Chapman Tripp represented AIG Insurance New Zealand Limited (previously Chartis Insurance New Zealand Limited) in the Court of Appeal, in a proceeding involving the same issue heard together with the Steigrad appeal.

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