Commercial, Insurance, Professional Indemnity

New Zealand Supreme Court overturns Bridgecorp regarding a statutory charge over defence costs – BFSL 2007 Limited & Ors v Steigrad [2013] NZSC 156

15 March, 2014

Author: Yasmin Bell

Judgement Date: 23rd December, 2013

Citation: BFSL 2007 Limited & Ors v Steigrad [2013] NZSC 156

Jurisdiction: Supreme Court of New Zealand[1]

In Brief

  • Pursuant to s 9(1) of the Law Reform Miscellaneous Provisions Act 1936 (NZ) (NZ Act) (similar to s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW))(NSW Act)[2], if an insured enters into a policy of insurance by which the insured is indemnified against liability to pay damages or compensation, then a charge will exist on the amount payable in respect of this liability.
  • A majority of the New Zealand Supreme Court (the highest court in New Zealand), overturned a previous decision of the New Zealand Court of Appeal, and found that the charge extends to any defence costs that are payable by the insurer before judgment is entered or settlement is agreed in respect of the claim.
  • This decision is inconsistent with the recent decision of the NSW Court of Appeal in Chubb Insurance Company of Australia Limited v Moore [3].


The proceedings relate to directors’ liability insurance taken out on behalf of the directors of the Bridgecorp Group of Companies (Bridgecorp) and Feltex Carpets Limited (Feltex). The policies in both instances covered not only claims for losses resulting from breaches of duty as a director but also the costs of defending any actions brought against the directors.

The receivers of Bridgecorp brought a claim against the directors including Mr Steigrad seeking to recover funds for the members of the public who invested in Bridgecorp. These claims exceeded, by a wide margin, the policy limit in the policy held by Bridgecorp.

The NZ Act

In summary, by s 9 of the NZ Act, a statutory charge is imposed in respect of any liability of an insured to pay damages or compensation over “all insurance money that is or may become payable in respect of that liability”. The charge arises on “the happening of the event giving rise to the claim for damages or compensation” and applies “notwithstanding that the amount of such liability may not then have been determined”.

NZ Court of Appeal Decision

The New Zealand Court of Appeal held that the charge under s 9 of the NZ Act did not extend to moneys payable for defence costs before any judgment or settlement.

The Court of Appeal found that the basis of the statutory charge had “not crystallised” until liability by way of settlement or judgment was established. Until this time it remained contingent and the only liability that had “crystallised” was the obligation to pay the defence costs. This approach was followed by the NSW Court of Appeal in Chubb Insurance.

As a result, an insurer would not be prevented from advancing defence costs, even when such advancement would reduce the cover available to meet any claim for compensation or damages. This meant that where a claim has almost reached the limit of indemnity and the insurer defended the claim, the plaintiff may have been unable to recover the whole of any judgment from the insurer.

The appellants contended that s 9 of the NZ Act should be interpreted to mean that defence costs are not able to be paid under the policy if to do so would deplete the funds available to meet the directors’ liability as eventually established in the relevant proceedings.

The respondents argued the s 9 of the NZ Act was not designed to interfere with the contract between the directors and their insurers and therefore that, until liability has been established by a judgment or settlement, payment for defence costs may be made as they fall due under the policies.

NZ Supreme Court Decision

The majority of the NZ Supreme Court allowed the Appeal.

The court found that the language of s 9 of the NZ Act (which is almost identical to s 6 of the NSW Act) made it clear that the statutory charge attaches at the time of the occurrence of the event giving rise to the claim and not at the time of judgment or settlement. The court found that there was nothing in the wording of s 9 to specify that the charge crystrallises on judgment or settlement.

As a result of this, the court held that reimbursement to the directors of their defence costs is not within the statutory charge.

The court considered that it was immaterial that the contractual obligation to pay the defence costs arose when the costs were incurred and that liability on the claim for damages had not yet been determined.

Section 9 of the NZ Act, along with s 6 of the NSW Act, creates not only a statutory charge in relation to third party claims, but also gives a direct right of action for third parties against the insurer to enforce the charge in cases of death, insolvency, bankruptcy or winding up of the insured. The court noted that in such circumstances any liability of the insured, if upheld, dates back to the time of the event giving rise to the claim. The court considered this to be another important indication that the charge arises on the happening of the event giving rise to the claim and not when the amount is finally ascertained.

The court noted that there is no provision in the NZ Act that the charge is reduced by any other payment made after notice of the charge is given, whether under the contract of insurance or otherwise. The court considered that this would add an undue level of complexity to a proceeding if, before issuing judgment, a judge had to enquire what remained of any insurance money and verify whether any payments that had been made were in fact properly made under the policy.

The court raised that if the respondents’ submission was correct, payment of defence costs would be allowed to deplete the insurance money available to a successful third party, thus in substance requiring the claimant to fund the insurer’s unsuccessful defence. The court noted that this would normally not occur under ordinary court costs rules and the fact that insurance for defence costs is covered in the same policy as the liability insurance does not point to the displacement of the normal costs rules, absent clear statutory language.

The minority of the NZ Supreme Court expressed concern that the decision of the majority interfered with the ability of the insured and the insured to defend third party claims and cited the Chubb Insurance decision in support of their position.


This decision means that, in New Zealand, in circumstances where the limit on a policy may be reached, payment of defence costs to meet a contractual obligation under a policy can only be met at the insurer’s own risk.

In such circumstances, careful consideration will be required by insurers as to the merits of the case and whether the advancement of defence costs is warranted.

If an inflated or unmeritorious claim is made, it will usually be in an insurer’s best interests to advance defence costs as the charge only covers the amount of the eventual judgment or settlement. However this would be at the risk of the insurer.

Insurers may avoid this problem by having separate limits of indemnity for defence costs and liability to third parties.

It is important to note that this is inconsistent with the Chubb Insurance decision of the New South Wales Court of Appeal. The Court, in Chubb Insurance, followed the New Zealand Court of Appeal decision finding that the charge under s 6 of the NSW Act does not extend to moneys payable for defence costs before any judgment, award or settlement. An application for special leave to appeal from the Chubb Insurance decision was due to be heard on 14 March 2014 but it was removed from the Court list.

It will be interesting to see whether the Chubb Insurance decision is overturned or alternatively if the NSW Parliament considers redrafting s 6 of the NSW Act. As noted by the New South Wales Court of Appeal in Chubb Insurance, the language of s 6 (and s 9 of the NZ Act) is “undoubtedly opaque and ambiguous” and should be repealed altogether or completely redrafted.

  1. Elias CJ, McGrath, Glazebrook, Gault & Anderson JJ
  2. Also similar to s25-28 of the Law Reform (Miscellaneous Provisions) Act 1955 (Act)
  3. [2013] NSWCA 2012 (Chubb Insurance)

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