A ruling in New Zealand could have profound implications, showing that “policies such as D&O and PI insurance should be able to advance defence costs and protect its insureds”.
AIG Insurance New Zealand has won its bid to overturn the Steigrad ruling in the Court of Appeal. The decision, which should give Directors great comfort, was announced late last year in New Zealand.
The Steigrad ruling which was handed down in October 2011 cast doubt as to the extent to which directors and officers could rely on their insurance cover to pay for defence costs when faced with potential third party civil claims significantly in excess of their Directors & Officers policy limits.
“This is a resounding success for AIG’s Claims and Underwriting teams in New Zealand,” commented Mike Pryce, Regional Manager Financial Lines – Chartis Australasia. “This decision should also assist in persuading the Australian courts that insurance policies such as Directors’ & Officers’ and Professional Indemnity should able to advance defence costs and protect its insureds and not be subject to a charge.”
AIG took the Steigrad ruling to the Court of Appeal because it believed that the decision could prevent directors and officers from adequately defending themselves against the financial impact of any claims brought against them.
The case before the Court of Appeal was that of the owners of failed carpet makers Feltex, which AIG argued was an example of how the Steigrad ruling penalised innocent directors. The Securities Commission investigated the failure of Feltex in 2006 and found no fault in the issuance of the prospectus.
However, the Feltex directors then faced claims from former shareholders in the company who alleged that Feltex’s 2004 IPO prospectus contained misleading information. AIG funded the Feltex directors’ defence costs and continues to do so, despite the Steigrad ruling. Without that funding, the Feltex directors would not have been able to afford the legal expertise to adequately defend their case against the shareholders, leaving them significantly disadvantaged.
AIG won on all counts, and was also awarded costs in the matter. The judges found that the appeal succeeded on the basis that a charge cannot interfere with the insurer’s contractual duty to pay defence costs and is not intended to rewrite the insurance policy.