Supreme Court limits access to insured defence costs

May 19 2014

Directors of two collapsed finance companies, Bridgecorp and Feltex, have looked to their directors’ and officers’ insurance policy for their defence costs in responding to claims by investors and receivers, and to cover any ultimate compensation that may fall due.

Section 9 of the Law Reform Act 1936 allows a third party to claim a charge over insurance money that might become payable to an insured for losses which the third party has suffered because of the insured’s actions. This would thereby ensure that insurance money intended to compensate for the loss should find its way to the suffering party.

Under the Bridgecorp/Feltex policy the directors’ cover for liability to pay compensation and cover for defence costs were amalgamated into one single sum. The Supreme Court3 has now found that the investors’ s9 charge does indeed secure the full insurance sum, including the funds that could have been paid to the directors in defence costs.

The decision has significant impact on how insurance policies should be drafted in the future. In particular, cover for compensation and defence costs should now be clearly separated rather than amalgamated into a single sum.

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