Keith Bethlehem, Partner Amanda Ryding, Partner

1. AIDA Conference 18 September 2013 A Bridge Too Far – the validity of charges over Insurance Moneys clarified Keith Bethlehem, PartnerAmanda Ryding, Partner

2. The "Bridgecorp" issue decided under Australian Law • What was "Bridgecorp" and why was it described by commentators as "one of the most important decisions affecting the D&O industry in recent years" (Allens Arthur Robinson: Annual Review of Insurance and Reinsurance Law 2011)? • Why was it in fact applicable to any third party liability policy? • Steigrad v BFSL 2007 Ltd [2012] NZCA 604 • Steigrad v BFSL 2007 Ltd [2011] NZHC 1037; (2011) 16 ANZ-Ins Cas 61-910 • NZ legislation identical to section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (and similar legislation in the ACT and Northern Territory)

3. Implications for directors • The first instance decision in Bridgecorp prevented directors from accessing insurance money to pay defence costs The Court held: • section 9 of the NZ Law Reform Act operates to create a charge in certain circumstances over any insurance money that is or may become payable in respect of an insured's liability to pay damages or compensation • in handing down the Bridgecorp decision, the New Zealand High Court held that a charge created by section 9(1) of the NZ Law Reform Act applied to the whole of the amount available under a D&O liability insurance policy issued by QBE to Bridgecorp, such that the charge prevented the directors of Bridgecorp from having access to the insurance money to meet their defence costs • the reasoning of the High Court of New Zealand was that, as the insurance money might become payable to Bridgecorp as a result of the litigation, Bridgecorp had a charge over that entire sum, and that the directors could not access that sum to pay their defence costs

4. Practicalities • Impact on the trial in the Victorian and WA Supreme Courts, arising from collapse of Great Southern: • claims exceeded available policy limits • Defence Costs paid exceeded $17M • assertion by plaintiffs that the $17M paid as a volunteer • mediation could not proceed where competing charges asserted over limits

5. Insurers' response • Given: • the risk that payments as volunteers • the "insurance paralysis" – ie the inability to obtain secure releases insurers launched Declaratory Proceedings • 'Centro' Proceedings settled before determination of similar declaratory proceedings • Implications for other major class actions where claims exceed limits of cover

6. NZ Court of Appeal • In the meantime, the NZ Court of Appeal handed down its judgment on appeal from the original Bridgecorp judgment as follows: • the object and purpose of section 9 of the NZ Law Reform Act is to provide a charge over money payable by an insurer to indemnify an insured party against his liability on a claim by a third party It does not provide a charge or security over insurance money that is not payable in settlement or discharge of that liability [at 29] • the statutory provision is limited to granting a charge in favour of a third party over "all insurance money" that an insurer is liable to pay in discharge of the insured’s liability to that third party Its terms cannot operate to interfere with or suspend the performance of mutual contractual rights and obligations relating to another liability [at 57], and • the purpose of section 9 of the NZ Law Reform Act is not to rewrite the bargain struck between the parties It is largely procedural in nature, and is a mechanism whereby a third party claimant can access directly funds which an insurer is liable to pay its insured to meet the insured’s liability to that third party [at 38]

7. NZ Court of Appeal (cont) • However, until a superior Court determined the issues in Australia, there remained uncertainty particularly when insurers were facing defences in the Declaratory Proceeding that asserted payments were made as volunteers

8. NSW Court of Appeal • Decided on Territoriality: No charge can exist where underlying litigation in respect of the claim is not in NSW • Notwithstanding the Court's finding that the Act had no application on these facts, the Court went on to make the following essential observations: • section 6 is not limited in its application to occurrence based insurance policies, but also applies to claims made and notified policies of insurance • section 6 does not apply where the alleged conduct of the insured giving rise to the claim for damages or compensation by the third party claimant happened before the inception of the relevant insurance policy • a charge under section 6 would not extend to insurance moneys payable in respect of defence costs, legal representation expenses, or costs and expenses that are paid by the relevant insurer in accordance with the policies The Court recognised that section 6 does not alter the contractual relationships between insurers and insureds The insurer remains bound to fulfill its contractual promise to pay defence costs irrespective of the existence of a charge

9. NSW Court of Appeal (cont) • any payment made by an insurer by way of indemnity for the liability of an insured to pay damages or compensation would (if there was a charge under section 6) constitute a valid discharge of the insurers' obligations under the policy if made before a judgment or settlement in relation to the claims of other claimants competing for the same limits This gives insurers the ability in such circumstances to settle claims on a rolling basis when faced with multiple claimants without having to wait for all claims to be resolved before assessing which claims should be paid first

10. Is it over? • Not yet: • time for special leave application to High Court yet to run • appeal pending to Supreme Court of NZ • questions remain as what is meant by the expression “the event giving rise to the claim for damages or compensation” – see paragraphs 136-141 of the Court of Appeal judgment • will the NSW Parliament heed the Court of Appeal's proposal at paragraph 55 of the judgment: "section 6 should be repealed altogether or completely redrafted in an intelligible form, so as to achieve the objects for which it was enacted"?

11. Links • Directors unable to access D&O policy to pay defence costs, 17 November 2011 http://www.cbp.com.au/Publications/Directors-unable-to-access-D-O-policy-to-pay-defen • New Zealand Court of Appeal overturns Bridgecorp decision, 20 December 2012 http://www.cbp.com.au/Publications/New-Zealand-Court-of-Appeal-overturns-Bridgecorp-d • Australia's Bridgecorp handed down, 12 July 2013 http://www.cbp.com.au/Publications/Court-of-Appeal-delivers-judgment-regarding-charge