The legal action being brought against the collapsed managed investment scheme Great Southern is bringing the issue of access to directors’ and officers’ (D&O) liability insurance to a head, with insurers launching action in the NSW Court of Appeal to determine whether D&O can be used to pay directors’ legal costs.

Great Southern, which collapsed in 2009, had 43,000 investors who invested $1.8 billion.

The collapse has triggered two sets of legal actions from investors seeking recompense. Lawyers Macpherson & Kelley are running 12 class actions in the Supreme Court of Victoria on behalf of 22,000 former Great Southern shareholders. They are believed to be seeking more than $1 billion from the company and some of its directors and officers.

Litigation funder IMF is also funding group actions in the WA Supreme Court on behalf of 2400 former investors in cattle and woodlot schemes run by Great Southern who had their investments exchanged for shares in the now worthless company a few months before it went under.

The investors are seeking around $88 million from the company. Perth lawyers Solomon Brothers are running the case.

Total claims in both cases exceed the magnitude of the D&O policy Great Southern had in place, and have raised the spectre of the New Zealand Bridgecorp case.

In Bridgecorp the court ruled that insurers cannot advance defence costs to directors and officers of a company who face legal claims from third parties such as investors that outweigh the size of their D&O cover.

It also restricts the use of D&O to pay settlements for directors and officers in such cases. The decision has not yet been tested in an Australian court, and as a result has thrown the local corporate world into turmoil over how to protect directors and executives from claims.

Bridgecorp impinges on Australian law through similar legislation in some Australian jurisdictions, including NSW.

It is believed the Solomon Brothers action has raised the issue of Bridgecorp in an effort to prevent Great Southern’s insurer, Chubb Insurance Australia, paying D&O insurance to fund the defence to the class actions.

This is because it believes its cases have priority over the class actions as they relate to the event known as Project Transform that saw cattle and woodland investments swapped for shares in the same year that Great Southern went into administration.

The class actions relate to events that occurred as far back as 2005, and Solomons argues that they fall outside the insurance year in which the D&O policy was paid and so have a lower priority for payment than its group actions.

A group of insurers including Chubb, Chartis, Allianz, Liberty and Axis last week took action in the NSW Court of Appeal to clear up the uncertainty created by the Bridgecorp decision.  The move was triggered by the Great Southern cases.

The action is aimed at clarifying which claimants get priority access to D&O insurance under Section 6 of the Law Reform Act NSW, whether events occurring before the relevant insurance policy year can be paid and whether defence costs can be paid out of D&O insurance regardless of impending third-party claims.

IMF director Hugh McLernon told insuranceNEWS.com.au the Court of Appeal finding will “be a very important decision with important impacts”.

The Bridgecorp decision is under appeal in New Zealand. Chubb and MacPherson & Kelley would not comment on the issue.

An August court decision on a case run by Macpherson & Kelley for investors of another failed timber investment scheme, Timbercorp, did not result in damages for investors.