28.04.2014

BFSL 2007 Ltd v Steigrad [2013] NZSC 156

On 23 December 2013, the Supreme Court delivered a controversial decision on the operation of s 9 of the Law Reform Act 1936 on costs-inclusive liability policies, which is likely to have ongoing adverse consequences for insurers and their insureds.

Section 9(1) of the Law Reform Act 1936 provides:

If any person (hereinafter in this Part referred to as the insured) has… entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability.

The receivers of the Bridgecorp group of companies and representative shareholders of Feltex Carpets Ltd (in receivership) brought claims against the directors and former directors of those companies.  The directors sought cover for their defence costs under certain insurance policies, which provided both an indemnity for the directors’ liability for third party claims and cover for their defence costs.  Under the terms of the policies, defence costs were payable as they fell due, but third party claims became payable only when liability was established, by a judgment or by settlement.  The policies were “costs-inclusive”: payment of any defence costs reduced the total amount available for payment under the indemnity.

The receivers and shareholders argued that the charge created by s 9(1) secured the maximum cover available under the policy for the indemnity from the date of the act or event giving rise to their claim.  The maximum sum secured by the charge could not, they claimed, be depleted by the payment of defence costs in the interval between the creation of the charge and the date of judgment or settlement.

The contrary argument, supported by a minority of two judges in the Supreme Court, was that the charge under s 9(1) attached to the contractual right to an indemnity under the policy.  The scope of that right (including the amount which must be paid) depended on the factual circumstances at the time the insurer was required to make payment under the indemnity.  If the insurer had already paid out defence costs in accordance with its obligations under the policy, then the maximum amount payable under the indemnity was reduced in accordance with the policy terms.

Notwithstanding the force of this argument[1], the majority held that the charge attaches to the maximum amount of cover that could ever be paid under the policy.  As a result, the insurer is “at peril” if it complies with its contractual obligation to pay defence costs in circumstances where there is insufficient insurance cover to meet both insurance obligations (namely the obligation to indemnify and the obligation to pay costs).

Unhelpfully, the majority did not address whether an insurer is entitled to refuse to pay defence costs in those circumstances.  Faced with a costs-inclusive policy and a claim that may exceed the policy limit, insurers have the unappealing options of breaching the contract with their insured, extending their risk above the maximum policy limit and/or litigation to establish whether or not their contractual obligation can be avoided.

Section 9 has general application to liability insurance policies.  While the industry response to the High Court judgment in Steigrad has seen a move away from costs-inclusive policies, litigation has a very long tail.  The judgment may have an ongoing impact on existing litigation claims, claims for which precautionary notifications have been made under costs-inclusive policies and project-specific policies under which claims have yet to surface.  Insurers and insureds will need to review the status of notifications made under such policies, and consider their options for addressing liability for costs if and when a claim eventuates.

Back to Summary Table

 


[1] Which is largely consistent with the judgment of the Full Court of Appeal of New South Wales in Chubb Insurance Co of Australasia Ltd v Moore [2013] NSWCA 212, (2013) 302 ALR 101
Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

Money stack black and white
Income is classified as relationship property – surprised?
For all couples, embarking on the journey of building a life together involves not only love and commitment but also financial considerations.  As you navigate through shared finances, it’s imp...
26.03.2024 Posted in Private Wealth
Forestry Unsplash ruben hanssen wl ylTCM
Forestry: Regulatory Roundup March 2024
The challenging economic environment for New Zealand’s forestry industry continues, with China’s demand for our logs remaining subdued. Moreover, in addition to the change in Government, t...
25.03.2024 Posted in Forestry & Property
solar
OIO Spotlight: Solar projects, exempted interests and farmland considerations
As New Zealand renewable energy developments continue to attract interest from global investors, we take a look at some recent approaches of the Overseas Investment Office in assessing consent require...
BCC Trade Credit v Thera Agri Capital: Policyholder Successful Against Credit Insurer in Australian Court of Appeal Decision
When applying for trade credit insurance, a prospective insured will typically provide information on the financing arrangements that will form the basis of cover. Where there is deviation from these ...
05.03.2024 Posted in Insurance & Trade and Transport
iStock
Parker v Magnum Hire: A new era of personal grievance remedies awarded in the Employment Relations Authority?
If you heard a sudden loud noise last week – no it wasn’t a jet plane flying overhead, it was the gasp of employment lawyers across New Zealand when the Employment Relations Authority published it...
26.02.2024 Posted in Employment
employment dictionary website
Banding together: the Court’s new approach to awards for injury to feelings
One of the key remedies available to an employee who has successfully established a personal grievance in the Employment Relations Authority (Authority) or the Employment Court (Court) is compensation...
23.02.2024 Posted in Employment
Trust liability under the Health and Safety at Work Act
WorkSafe New Zealand v RH & JY Trust & ors
21.02.2024 Posted in Health & Safety & Private Wealth
SEND AN ENQUIRY
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.