There have been some noteworthy developments in the Australian insurance industry in recent times, including one across the ditch which is having a significant impact on directors and officers in both New Zealand and Australia. Briana Everett reports

A recent High Court decision in New Zealand has the potential to change the Australian insurance landscape considerably.

Dramatically altering the coverage of directors’ and officers’ insurance policies with respect to the advancement of defence costs, the New Zealand High Court has added a layer of complexity to large corporate collapses, with significant consequences for both New Zealand and Australian directors and the insurance industry.

In September 2011, the New Zealand High Court held in Steigrad & Ors v Bridgecorp Limited & Ors that third party claimants have a charge over all insurance money payable under a directors’ and officers’ (D&O) insurance policy, and that the charge has priority over any claim by directors to defence costs.

The proceedings involved the 2007 collapse of property development group Bridgecorp, which at the time had almost $500 million owing to investors.  In the wake of the collapse, five of Bridgecorp’s directors were charged with making false statements in prospectuses and other documents. The receivers of Bridgecorp brought proceedings against the directors seeking orders requiring them to pay the property developer more than $450 million.

Bridgecorp held a D&O insurance policy, which provided $20 million of cover, as well as a statutory liability policy with coverage of $2 million covering the directors’ defence costs, but not any liability to third-party claimants.

Having used the $2 million indemnity under the statutory liability policy, the Bridgecorp directors sought to claim their defence costs under the company’s D&O policy. With another $3 million expected to accrue while defending the claims, less money would be available for Bridgecorp under the D&O policy. In light of this, Bridgecorp claimed a charge under section 9 of the Law Reform Act, arguing that it had a priority claim to the insurance money.

The directors disagreed and sought a ruling from the High Court.

“The Bridgecorp decision in New Zealand identified a possible gap in insurance cover for directors and officers where their companies have gone into liquidation,” explains Moray & Agnew partner Geoff Connellan, who heads up the firm’s Sydney liability insurance practice and the firm’s national indemnity group.

“The legislation they looked at in New Zealand [in Bridgecorp] is identical to New South Wales legislation. In fact we stole it from the New Zealanders back in the middle of last century … The reality is [that while] it may not ultimately be the law in Australia, at the same moment there’s a good chance it is the law because it [relates to] the same legislation.”

According to Connellan, the Bridgecorp decision has meant that insurance lawyers must now take extra care when advising Australian insurance companies as to whether they should be paying defence costs.

“The insurance market is now offering to sell separate standalone defence cost-type covers to directors … There has been a lot of activity in the last six to 12 months with insurance companies offering that,” says Connellan.

“That’s an important trend. You might not think it’s fair that a rogue director has his defence costs paid, but the reality is there are many people who are brought into litigation who are not rogue and need to have good defence to these claims.

“It’s a very interested development to come out of New Zealand.”

Aside from the impact on the market of Bridgecorp, Carter Newell insurance partner Mark Brookes says the insurance industry is already experiencing strong competition for market share. 

“Insurance cover is still relatively cheap, particularly bearing in mind the claims experience that most insurers are having. There is no shortage of PI claims and there is certainly no shortage of D&O claims,” says Brookes.

Due to Australia’s “soft” insurance market, as well as the flow-through effects of the Bridgecorp decision, Brookes says the industry is experiencing an “evolution in competition and policy wordings”, including the introduction of these standalone defence cost policies.

“Insurers are working hard to try and make sure their insureds have protection. [The emergence of these standalone policies] are probably the hottest potatoes in the world of D&O,” he says. 

Similarly, Lander & Rogers partner Jon Hunt has observed the recent increase in competition in the insurance market and the focus amongst insurers on cost containment, but adds that there is an air of uncertainty in the industry.

“There is certainly competition amongst the insurers for business and a lot of insurers are value-adding to their claims-handling service,” says Hunt.

“An insurer recently sought a declaration in the Supreme Court as to the applicability of Bridgecorp … Hopefully that decision will provide a bit of clarity and certainty in so far as insurers are concerned.”

The lag effect

While the Australian industry braces itself for the impact of Bridgecorp, insurance lawyers are still dealing the effects of the global financial crisis and legislative changes made years ago.

“You often hear lawyers talk about how long it takes for the effects of legislation or an event to have an impact on the day-to-day running of cases,” says Connellan. “Well that has happened this year.”

The concept of proportionate liability, introduced through amendments to the Civil Liability Act in 2005, was recently the focus of the NSW Court of Appeal in Mitchell Morgan Nominees v Vella, which clarified the issue of proportionate liability and how it is to operate.

According to Connellan, the Court of Appeal’s decision means lawyers and insurers of parties in particular transactions need to carefully consider what the damage is that is said to have been caused by their client’s negligence.

“We’ve all been dealing with the [Civil Liability Act] for 10 years but the Court of Appeal decision, which was only three or four months ago, clarified in New South Wales how [proportionate liability] is going to work in practice, which is very important to insurers,” he says, noting that while the decision was a NSW one, it is likely to be applied in other states.

“It will have an impact upon cases particularly where the losses result from the activities of different professionals in a transaction. So again, we’re all sort of learning from that as we go.

“It is important because it does impact upon many claims for economic loss where there is a multitude of defendants suing for the loss.”

As such legislative amendments continue to impact the insurance space in 2012, so too does the global financial crisis and the losses that resulted from the collapses of 2008 and 2009.

“Everyone talks about the GFC in 2008,” says Connellan. “Well, here [we are] in 2012 and many of the claims arising out of the GFC have percolated to the top, if you like, and they’re now getting to the point of either being the subject of mediation or litigation.

“So in 2012, the public face of those cases that have been bubbling around for a couple of years is being seen. We’re doing the litigation today about events which occurred four or five years ago.”

With no shortage of litigation in the insurance space, both Connellan and Carter Newell CEO Peter Ellender say that finding the right talent to deal with the workload is a challenge for insurance firms.

“Insurance lawyers seem to be less mobile at the moment,” says Ellender. “The volume of candidates to review, [has lessened] in the last 12 months.”

While agreeing that insurance lawyers are less mobile in 2012, Connellan says the lack of available lawyers is a result of the changing nature of insurance law.

“Yes it is hard to find staff and the reason for that is, the nature of the way you practise insurance law has changed over the years and that is driven by a reduction in the amount of litigation,” says Conellan.

“Nowadays, we have a lot more mediation and alternative dispute resolution, so I think there’s a dearth of young lawyers coming through to the point of being able to manage insurance claims … I think there is a shortage of quality people in that five or six year level.”

The current shortage of good insurance lawyers in the market adds to one of the current challenges being faced by insurance lawyers, which is dealing with the sheer volume of claims.

“It’s a very litigious environment. Perhaps two or three years ago, there were certainly a volume of claims but quite often the relationship was more important than the problem, so people would work hard to sort out any problems rather than getting involved in litigation, because everybody was making lots of money,” says Brookes.

“But now, the problem is more important than the relationship and with professional indemnity for example, lots of people are losing money, particularly in the financial services area. People are very quick to … look to somebody else to blame for their losses.”