Section 9 Law Reform Act 1936 – Charges over Insurance Money

POSTED BY Karl Stolberger
24 June 2013

posted in Caselaw | Insurance

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Where a liability arises under an insurance policy the Law Reform Act 1936 (Act) allows an injured third party to claim directly against another party's insurer. Usually this right is invoked where the insured is insolvent. Section 9 of the Act creates a charge over the relevant insurance monies in favour of the claimant and thus protects those monies from the claims of other creditors of an insolvent insured. An insurer cannot however be made liable beyond the scope of its obligations under the applicable policy.

In Steigrad & Others v BFSL 2007 Ltd & Others (15 September 2011, High Court Auckland, CIV-2011-404-611) the High Court considered the application of s.9 in the context of a directors and officers liability policy. The policy insured the Bridgecorp companies and their directors for liabilities incurred to third parties and also for reasonable defence costs incurred in defending criminal and civil proceedings seeking to establish such liabilities. The two aspects of cover were subject to a single limit of indemnity.

The defendant Bridgecorp companies claimed a s.9 charge over the proceeds of the D&O policy for amounts (which significantly exceeded the level of indemnity under the policy) which they intended to claim against the directors in civil proceedings. This caused the insurer to advise the directors that it would not make payments in respect of defence costs until agreement had been reached on the allocation of funds.

No agreement was reached and the directors sought a ruling from the High Court that s.9 did not prevent the insurer from meeting its obligations under the D&O policy by reimbursing the directors for their defence costs.

The judge noted that a s.9 charge applied to all insurance money that is or may become payable. He said that s.9 contained no mechanism that would enable funds to be released to meet the insurer's other obligations under the policy. The judge was also influenced by the view that allowing the directors to run up defence costs would reduce the balance available under the policy for third party indemnity claims.

Whilst conscious that it produced some unsatisfactory consequences the High Court accordingly held that, on its interpretation of s.9, the insurer was prevented from meeting the directors' defence costs and was required to hold the insurance fund intact for the benefit of the Bridgecorp companies and any other civil claimants who might have priority over them.

Mr Steigrad appealed. The Court of Appeal ([2012] NZCA 604) (which also heard an appeal at the same time in an unrelated case which raised the similar issues) reversed the High Court. It said that s.9 did not apply to insurance monies payable in respect of defence costs, even where such cover is combined with third party liability cover and made subject to a single limit. It confirmed that s.9 has limited effect and is not intended to rewrite or interfere with contractual rights as to cover and reimbursement. In this case the wording of the policy provided the necessary mechanism to allow for payment of defence costs. Accordingly s.9 did not give the Bridgecorp companies a statutory charge over insurance monies lawfully payable to Mr Steigrad to reimburse his liability to pay defence costs. The Court said:

"To put the point another way, there was no suggestion that, if there had been separate defence costs and third party liability policies, s 9 would have applied to the defence costs policy. Combining the two forms of cover – defence costs and third party liability in a single policy with separate sums insured would not affect this outcome. In our view, combining the two forms of cover in a single policy subject to a single sum insured does not change this analysis either. There is a single aggregated fund from which two distinct liabilities can be met. The charge attaches to the balance that is available to meet third party claims after any defence costs liability has been met.”

The Supreme Court has granted leave to appeal ([2013] NZSC 32).

The High Court decision caused insureds and insurers to reconsider the basis on which D&O cover was often previously written, so that cover for defence costs is clearly separated from cover in respect of third party claims. If the Court of Appeal ruling stands then previous policy wordings will continue to have the effect which we suspect insured's and insurers always intended. However, whilst in our view the Court of Appeal's interpretation of s.9 is the correct one, there remains the possibility that it may be reversed by the Supreme Court. Prudence therefore dictates that insureds and insurers continue to have regard to s.9 and to the risks of combining third party liability cover with cover for defence costs in a single policy with a single limit of indemnity when arranging their insurance cover.

Image creative commons licenced by Alan Cleaver.

 

POSTED BY Karl Stolberger
24 June 2013

posted in CaselawInsurance

VIEWED 7964 TIMES

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