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DIRECTORS’ & OFFICERS’ LIABILITY INSURANCE – ARE YOU COVERED?

Last year, the High Court gave an important decision affecting directors and officers liability insurance involving the former directors of Bridgecorp.

The directors and officers liability insurance was intended to cover claims against the directors as well as meet the directors’ defence costs.

Section 9 of the Insurance Law Reform Act 1936 automatically creates a charge over the insurance proceeds in favour of any third party claimant. Previously, it was not thought that the existence of this charge prevented payment of defence costs under the insurance contract whilst the claim was ongoing. The High Court decision has changed that.

In the Bridgecorp case, the amount of the claim exceeded the total available under the insurance policy and the Court held that as the whole of the insurance proceeds were charged in favour of the claimant receivers, the directors could not have any access to the policy to meet their defence costs.

There is some debate about whether the High Court’s interpretation of the relevant statutory provisions is correct. However, the decision in the Bridgecorp case will remain the law until overturned by a higher court or departed from in a future High Court decision.

This decision of the High Court should be taken into account at the time of renewing any directors’ and officers’ liability insurance. Directors will need to consider whether the level of cover is sufficiently high enough to ensure that the policy will adequately cover any potential claim whilst leaving adequate funds available for defence costs. If that is not the case, or the level of potential claims is too difficult to assess, consideration needs to be given to having a separate policy to cover defence costs.

Insurers are working on their products in light of the Bridgecorp case but it will be important for directors to fully understand the level of cover, the nature of the cover, and the excesses which may arise.