Australian courts are expected to follow the New Zealand Court of Appeal’s decision to quash the Bridgecorp decision on directors’ and officers’ (D&O) cover, which forced insurers to redesign policies.

The Court of Appeal on December 20 overturned the 2011 New Zealand High Court decision that effectively stripped directors and officers of access to defence costs under a D&O policy if they faced a third-party claim that exceeded the sum insured. 

Receivers and shareholders running class actions against directors of failed companies took up the decision in Australia and New Zealand, where insurance can be one of the few substantial assets and the third-party claim can easily exceed the D&O sum insured.

New Zealand legal experts expect the latest decision to be appealed in the Supreme Court, the country’s highest court. This would have to be lodged by February 12.

The Court of Appeal found the High Court had denied an insured’s contractual right to reimbursement of defence costs, which was inconsistent with section nine of the NZ Law Reform Act, on which the earlier decision was based. NSW, the NT and ACT have similar legislation.

A case involving the failed Feltex carpet company and Chartis was heard by the Appeals Court at the same time. The court ruled Eric Houghton, who is leading a shareholder class action against Feltex, had no entitlement to money payable by Chartis to the Feltex directors.

Chartis Regional Manager Financial Lines Mike Pryce says the New Zealand decision should help persuade Australian courts “that insurance policies such as directors’ and officers’ and professional indemnity should be able to advance defence costs and protect its insureds and not be subject to a charge”.

He expects D&O policies in New Zealand to revert to a more traditional format, with loss and defence costs within the limit.

Mr Pryce says Chartis is working with the Insurance Council of Australia and the NSW Attorney-General to resolve the issue in Australia.

“The concerns that were first raised in the Steigrad [Bridgecorp] decision have not been resolved by an Australian court and there are still a number of class-action lawyers pursuing charges in a similar manner to the original Steigrad decision,” he told insuranceNEWS.com.au.

“While we believe the New Zealand decision has provided a sensible and pragmatic approach, it is for the relevant state governments to determine what action is required.”