Company directors, their insurers and brokers face further uncertainty about whether directors’ and officers’ (D&O) policies provide guaranteed access to defence costs, with a crucial Australian case now heading for the High Court.

At the same time, New Zealand’s Supreme Court has settled the matter there in a decision that restores the original Bridgecorp judgement of 2011, giving a company’s creditors precedence over directors’ and executives’ access to defence costs under D&O policies.

The 2011 decision triggered litigation in both countries because NSW, the ACT and NT have similar legislation to that on which the New Zealand ruling was based.

Insurers began redrafting policies to separate defence costs from third-party claims by shareholders and receivers, or writing stand-alone policies for defence costs.

The NSW Court of Appeal last year rejected the Bridgecorp decision when it heard the Great Southern-Chubb case and decided a third-party claimant should not be in a more favourable position than the insured when a policy is intended to cover defence costs.

The case involving collapsed plantation company Great Southern was a victory for seven insurers that sought the right to pay legal costs before damages or compensation payable under shareholder class actions.

An application for leave to appeal in the High Court could be heard this month.

New Zealand and Australian courts have now taken opposing positions on D&O entitlement.

The New Zealand Court of Appeal last year overturned the 2011 Bridgecorp decision, but on December 23 the Supreme Court reversed that ruling, settling the matter unless Parliament changes the law.

The courts had to decide whether directors of failed companies Bridgecorp and Feltex could use their D&O policy proceeds for defence costs, depleting the amount that could be paid to receivers and shareholders.

The five New Zealand Supreme Court judges were split 3-2. Their judgement says it is irrelevant that the liability for defence costs is established before any compensation or damages are decided.

They say the insurer’s contractual obligation to pay defence costs does not mean it can undermine the third-party charge.

Policies that cover both third-party liability and defence costs protect creditors, but insurers pay defence costs at their peril because they then risk having to pay the whole sum insured to a third party.

QBE underwrote the $NZ20 million ($18.8 million) Bridgecorp policy and AIG the Feltex cover, which is understood to be $NZ50 million ($47.22 million).

Bridgecorp’s directors are being sued for more than $NZ340 million ($321.1 million).

The Supreme Court says the charge attaches when the event occurs that gives rise to the claim for compensation by third parties.

An insurer “may be entitled” to be cautious about paying defence costs when it is aware of a third-party claim, but the court has not ruled on whether an insurer can refuse to pay defence costs, saying the parties can return to the High Court on this issue.

The two dissenting judges say payment of defence costs allows insureds to defend unmeritorious claims, or claims for excessive amounts. “In doing so, it helps ensure the integrity of the operation of the insurance policy.”

They say D&O policies should pay defence costs until the amount of a third-party liability is determined.