The industry could be heading for another blow over whether insurers can use insurance proceeds to pay their policyholder’s defence costs, after the plaintiffs in the Great Southern case lodged an appeal with the High Court to overturn the judgement made by the NSW Court of Appeal.
The plaintiff in the Great Southern case (Chubb Insurance Company v Moore),
has lodged an appeal against the decision that was handed down in July last year by the NSW Court of Appeal.
The court had ruled that directors can use the funds paid for their D&O policy to fund their defence costs
. This was met with jubilation from the insurance industry as it would mean their clients could have their day in court and not fund it out of their own pocket, which could potentially bankrupt them.
However the decision could be overturned if the High Court allows the plaintiff to appeal and the appeal succeeds. The High Court is said to be due to hear the plaintiff’s special lead application in February/ March.
This comes as a similar case in New Zealand, the Bridgecorp decision, reached a bitter conclusion.
Last month, the Supreme Court ruled that a charge could be placed on the directors of Bridgecorp’s policy, allowing the plaintiff to freeze the defence’s insurance proceeds until the claim is settled. The court also decided that carpet-makers Feltex’s directors could not use their AIG
New Zealand insurance policy to pay their defence costs in the shareholders’ action against them.
This means that if the claim exceeded the limit of liability the insurers could not deduct the defence costs from that policy, AIG
Australia’s commercial institutions manager of financial lines, Jeremy Scott-Mackenzie told Insurance Business
“If the insurers paid the defence costs from the policy and there was later a finding that exceeded the cost of the insurance policy, the insurer would have to pay the defence costs in addition to the limit of liability,” he continued.
Giving an example, he said that if the policyholder had as $10m policy and the insurer had paid $5m in defence costs and there was a finding for $20m, the insurer would have to pay $10m towards the settlement plus pay any legal costs incurred to date.
Scott-Mackenzie said although the decision had no bearing on Australia, it could be problematic for the New Zealand insurance industry.
"This is not good news for directors in New Zealand because the reaction from D&O insurers may be to withhold defence costs where a claim may breach the policy limit, with the result that the directors’ have to fund their own defence. In the absence of legislative reform in New Zealand, this may become a not infrequent outcome.
"The Supreme Court of New Zealand is the highest court in the land so legislative amendment is the only real avenue by which the law in New Zealand can be changed."