BUSINESSDESK: The Court of Appeal has reserved its decision in the fight to free up director indemnity insurance to cover the cost of defending claims in the Bridgecorp receivership and Feltex Carpets class action.
The former Bridgecorp directors Peter Steigrad, Bruce Nelson Davidson and Gary Urwin were appealing a ruling in the High Court last year that blocked access to their $20 million directors' and officers' liability (D&O) policy to cover their defence costs.
They were were joined by the former Feltex board and its insurer Chartis New Zealand, who sought a declaration in December on whether their D&O cover could be used for defence costs after the Bridgecorp ruling.
Counsel for the Bridgecorp receiver, Murray Tingey, told Justices Mark O'Regan, Terence Arnold and Rhys Harrison in Wellington the structure of the Bridgecorp D&O policy meant defence costs ranked behind a potential claim on liability and could not be drawn on.
He argued the full amount should come to the receivers. By pooling the policy's limit, rather than divvying up how much could be allocated to defence costs and how much to liability, secured creditors had priority.
"When those directors came to claim their costs, the liability limit was exhausted by the charge, so the insurer can say we're not going to pay this," Mr Tingey said.
"They chose to take a policy with composite (pooling) – the reason they may have done that was for the benefit of the company, but that's just what the bargain is."
Michael Ring QC, counsel for Chartis, told the court the Bridgecorp directors joined the board "on the faith of the promises" that they would be covered by liability insurance, and that the receivers' position
"pulls up the rope ladder and says 'hang on, you're going to have to pay the defence costs yourself'."
He said "defence costs cover are fundamental" to the policy contract, with the cover designed to either prevent legal liability, or minimise it, with anything left over to go to a claimant.
A claim could not be made on the policy until it was quantified, which could only happen after any defence, he said. That would have to lead to defence costs being met by the policy.
Austin Forbes QC, counsel for former Feltex shareholder Eric Houghton, who is leading the class suit against the carpet maker, said defence costs advanced by an insurer were conditional, and was only one of four elements that were covered by Feltex's policy to protect against securities claim.
Alan Galbraith QC, counsel for the former Feltex directors, said the obligation between the insurer and the insured party would be breached if defence costs couldn't be claimed, and would "increase exposure of the insurer" and "change the contract entitlements for the insured".