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GRC Professional : GRC Spring 2012
33 DIRECTORS AND OFFICERS (D & O) insurance is once again under the spotlight in the New Zealand courts. In the frame are AIG Insurance and failed finance company Hanover Finance. Hanover collapsed in July 2008 owing $465 million to 13,000 investors. Its subsidiaries United Finance and Hanover Capital also collapsed, owing $89 million. At issue is what period of time the company prospectuses were covered under the company's $20 million D & O cover policy it had with Chartis (previously called AIG and now branded AIG again). The case has some similarities to the landmark Bridgecorp judgment (Steigrad & Ors v Bridgecorp Ltd) handed down by Justice Graham Lang in the High Court in Auckland in August 2011, which is now subject to appeal. Both question the pecking order of liability payouts to claimants as both involve legal action against directors for amounts far exceeding the policy cover -- in both cases $20 million. The Bridgecorp case centred on directors wanting to use the company's D& O cover to pay for the legal costs of their defence against charges that they defrauded the company. The judge sent the insurance industry into a spin on both sides of the Tasman when he ruled that section 9 of the New Zealand Law Reform Act 1936 should be taken into consideration. That section effectively says when an event arises -- in this case directors needing to fund their legal costs -- that a charge be created over the insurance money. Liquidators and receivers of Bridgecorp companies had signalled to the insurer their intentions to take civil proceedings against the directors for more than $450 million. But at the time of the criminal case, the other charges had not been laid and even though there was a sub-limit of $500,000 per director for defence costs, it was a moot point because the $450 million was way in excess of the $20 million cover. So the directors, though listed on the policy a s beneficiaries of the cover, did not get the money to pay their legal bill because the insurer had been put on notice about the other potential claims. Australian states have similar legislation to the New Zealand act, and as a result of this judgment the insurance industry on both sides of the Tasman has since been busy looking at the future shape of these particular policies. QBE, the insurer at the centre of the Bridgecorp case is also in legal action with Hanover over a similar statutory liability policy where Hanover is seeking defence legal costs including costs incurred in relation to investigations by regulatory bodies. In that case QBE is admitting the policy and the claim but says it is not liable because fraudsters who ran a Ponzi scheme personally duped two of the former Hanover directors, Mark Hotchin and Kerry Finnigan. QBE claims that the incident ought to have been disclosed when it happened in 2004, as it tainted subsequent annual policy renewals. QBE would not have known about the directors' involvement back then because their names were suppressed until quite recently. Meanwhile, in the High Court in Auckland, AIG said of its D & O policy, issued in November 2007 by Chartis, that the cover was only for a 2006 prospectus and it did not agree to provide cover for liability arising from all Hanover prospectuses. Like Bridgecorp, the outcome of this and the QBE case is expected to affect potential payouts to creditors of the failed companies. ••• INSURANCE So the directors, though listed on the policy as beneficiaries of the cover, did not get the money to pay their legal bill because the insurer had been put on notice about the other potential claims. D&O insurance court focus again If you are involved in selecting insurance policies for your organisation, the following cases are essential reading for you to discuss with your brokers. BY DENISE MCNABB
GRC Winter 2012
GRC Summer 2013