The NSW Court of Appeal has handed down Australia’s first major decision on access to directors’ and officers’ (D&O) cover, ruling insurers can pay defence costs under D&O policies before any third-party claim on the policy proceeds.

Thursday’s decision, relating to the collapse of plantation company Great Southern, is a victory for seven insurers that sought the right to pay legal costs before damages or compensation that could become payable under shareholder class actions.

The court also ruled the case should be heard in NSW, where the claim was brought. This could have been an issue because the Great Southern shareholder actions are being fought in Victoria and WA, while the company officers and insurers are in different states.

The unanimous ruling by five judges was keenly anticipated in Australia and New Zealand following the Bridgecorp decision of 2011, when New Zealand’s High Court ruled a receiver had first claim on D&O policy proceeds when the claim might exceed the amount of cover. This effectively denied company directors and executives funding for legal defence costs.

The decision made waves in Australia because NSW, the ACT and the NT have legislation that mirrors the New Zealand law applied in Bridgecorp.

That decision has since been overturned, although a final appeal will be held in October. Last week’s NSW decision further strengthens the position of insurers and company officers.

Chubb, AIG, Allianz, Axis, Liberty, QBE and Lumley had asked the NSW court for declarations clarifying how the NSW Law Reform (Miscellaneous Provisions) Act applies.

AIG Commercial Institutions Manager Jeremy Scott-Mackenzie says directors and executives can sleep easier knowing their D&O policies will advance defence costs if they are sued.

The NSW decision “is a sensible and pragmatic approach to the legislation”, he told insuranceNEWS.com.au. “It provides certainty to directors and allows them to have their day in court, because their legal costs can be paid by the insurers.”