Steigrad ruling met with mixed reactions

by Mackenzie McCarty03 Feb 2014
The Supreme Court judgement regarding BFSL 2007 Ltd & Ors (In Liquidation) v Steigrad, announced just before Christmas last year, has received a mixed response from major corporate and commercial law firms.

Court documents show the Supreme Court, by majority (comprising the Chief Justice, Glazebrook and Anderson JJ) held that the statutory charge covers whatever the amount of liability to the third party eventually turns out to be.

“Reimbursement to the directors of their defence costs is not within the statutory charge. It is immaterial under the statute that the contractual obligation to pay the directors’ defence costs arises when the costs are incurred and that liability on the claim for damages is not yet determined or payable. The effect of the charge is that payments under the insurance policy to meet the directors’ defence costs can be met only at the peril of the insurer when there is insufficient insurance cover under the limit of the policy to meet both insurance obligations.”

Chapman Tripp partners, Adam Ross, John Knight, Garth Gallaway and senior associate, James Burt, have released a statement claiming the decision ‘overturns well-established industry practice, deprives the insureds of a critical benefit for which they contracted and makes New Zealand something of an outlier in the international liability insurance market’.

The firm acted for AIG, the insurer to Feltex and its directors, in support of the right of directors to advancement of defence costs and the above lawyers say the firm’s concerns regarding the content and implications of the Supreme Court’s judgment are ‘widely shared’, not only in New Zealand but by overseas commentators as well.

“The D&O Diary, a blog by US D&O specialist Kevin LaCroix, described the decision as ‘surprising and unwelcome’ and said that, perhaps ‘owing to its antipodal provenance’, it stood on its head the idea that liability insurance exists to protect the insured, not to protect claimants.”

However, Bell Gully, who acted for the receivers of Bridgecorp, also released a statement following the judgement, calling the Supreme Court’s decision ‘a welcome result’ for the victims of the finance company’s collapse.

“The Supreme Court’s decision is the most significant case concerning liability insurance for many years,” wrote Bell Gully partners, Murray Tingey and David Friar.
“It is a welcome result for investors in Bridgecorp and other financial companies, many of whom lost their life savings when the financial company sector collapsed.”
However, Tingey and Friar warn that this may not be the last of the litigation concerning section nine.

“Given the Supreme Court’s comments that insurers may be liable for both the amount of the statutory charge and defence costs, we expect more litigation to come.”