One of the questions we recommend directors ask their insurers was “Are directors entitled to payment as legal defence costs are incurred (or in advance) or only as reimbursement?”

We also observed that as a policy usually has an overall aggregate limit of liability covering all the different types of cover, unless there are sub-limits a high claim in one area of the policy in one year may limit the amount available in other areas of the policy in that year.

In Steigrad v BFSL 2007 Limited [2011] NZHC 1037 (the Bridgecorp decision) the NZ High Court decided that the Bridgecorp directors were prevented from having access to their company’s D & O policy to meet their defence costs because there were civil claims by investors relating to the collapse of Bridgecorp that were potentially in excess of the $20 million limit of the D&O policy. The D&O policy aggregated cover for liability and defence costs.

The Bridgecorp receivers argued that the full amount of insurance should come to the receivers. By pooling the policy proceeds, rather than separating how much could be allocated to defence costs and how much to liability, secured creditors had priority.

The directors argued that a claim could not be made on the policy until it was quantified, which could only happen after any defence.

The appeal of that decision to the NZ Court of Appeal has been heard and judgment reserved.

The decision is relevant to all directors’ liability insurance providing coverage for civil compensation in which defence costs are within the aggregate limit.

The case has also highlighted the issue of whether when there are either multiple claims and/or multiple claimants, an insurer may be precluded from making compensation payments until all claims have been resolved.

While there have been no similar cases in Australia different insurers have responded in different ways.

Directors should review their policies in advance of renewal.