Directors: call your (insurance) brokers

Introduction

Nearly a year to the day after the Court of Appeal, in Steigrad v BFSL 2007 Ltd [2012] NZCA 604, gave insured directors a Christmas present, the Supreme Court has played Scrooge for directors and Santa for liquidators and receivers of, and investors in, failed finance companies to recover losses by pursuing directors of those companies for breaches of their directors' duties and also for breaches of the Securities Act 1978.

On 23 December 2013 the Supreme Court released its decision in BFSL 2007 Ltd (in liquidation) v Steigrad [2013] NZSC 156 where, by a three-two majority, the Court reversed the decision of the Court of Appeal. In doing so the Supreme Court has effectively 'cut-across' the terms of a large number of directors' and officers' liability policies held by directors and prevented them from accessing costs to defend claims where the amount claimed exceeds the policy limit.

What was the case about?

The decision dealt with two separate cases which were consolidated in the Court of Appeal. The first involved a claim by the liquidators of Bridgecorp and associated entities against its directors; the second was an application brought by the former directors of Felxtex Carpets Ltd in the class action suit brought against them by investors. Both cases dealt with the same issue, namely the application of section 9(1) of the Law Reform Act 1936 to directors' and officers' liability policies.

Section 9(1) of the Law Reform Act 1936 creates a "charge in favour of [a] third party over any insurance money "that is or may become payable" in respect of the insured's liability to the third party" (paragraph [15] of the Court of Appeal judgment). In simpler terms, it means where third parties suffer loss caused by an insured, and the insured has insurance to cover the loss suffered by the third party, then the third party has a 'charge' over the insurance moneys paid. The obvious example is where person A has third party car insurance and causes an accident that damages B's car. In that case, B has a charge over the money paid out under the third party policy; that means B has a claim to those proceeds ahead of any of A's other creditors.

What did the Court decide?

The question confronting the Court in the two cases dealt with in Steigrad was how section 9(1) works where directors have a policy that covers both the liability of directors to third parties for losses caused by breach of their directors' duties and by breach of the Securities Act 1978 and associated defence costs, up...