Insurer Wins in Court Of Appeal – Steigrad Ruling Overturned

20 December, 2012

Insurer Wins Case in Court Of Appeal – Steigrad Ruling Overturned

AIG Insurance New Zealand (“AIG”) has won its bid to overturn the Steigrad Ruling in the Court of Appeal.

The Court of Appeal ruled in AIG’s favour today.

The Steigrad ruling was handed down in October of last year and stated that directors could not obtain an advancement for defence costs under their Directors’ and Officers’ (D&O) policy when faced with potential third party civil claims significantly in excess of the D&O limit.

The leading commercial insurer took the Steigrad ruling to the Court of Appeal because it believed that the decision could prevent directors and officers from adequately defending themselves against the financial impact of any claims brought against them.

The case in front of the Court of Appeal was that of the owners of failed carpet makers Feltex, which AIG argued to be evidence of how the Steigrad ruling could penalise innocent directors. The Securities Commission investigated the failure of Feltex in 2006, and found no fault in the issuance of the prospectus. However, the Feltex directors then faced claims from former shareholders in the company who allege that Feltex’s 2004 IPO prospectus contained misleading information. AIG has funded the Feltex directors’ defence costs and continues to do so, in spite of the Steigrad ruling. Without funding, the Feltex directors would not have been able to afford the legal expertise to adequately defend their case against the shareholders, leaving them significantly disadvantaged.

AIG’s New Zealand CEO, Cris Knell said the outcome was good news for New Zealand business.

“We always maintained that the Steigrad ruling could have long term consequences on the ability of New Zealand businesses to attract and maintain talented directors.”

Mr. Knell added, “It’s important to realise that a noticeable number of claims against businesses and individuals brought before the court are ultimately unfounded. The fact is that few people, no matter how highly paid, can bear the financial cost of the level of legal expertise required to defend themselves against D&O claims. In fact, directors may well choose to avoid serving on a board in New Zealand and take their talent elsewhere.

“Our position is not about protecting blatant wrong doing, or directors who have misled investors or even committed crimes. Good D&O policies are about protecting the talented and honest managers and senior executives.”

AIG‘s financial lines manager in New Zealand, Ryan Clark states the company’s D&O policy protects directors and officers as well as senior managerial staff against a multitude of risks which may be unknown, or simply overlooked.

“Often what starts out as a simple claim against the insured can incur significant costs in mounting a fair legal defence. The Steigrad ruling would have prevented them from receiving funding to pay these costs through the terms of a the insurance policy they have paid for, and amounts to a breach of contract”

Mr. Clark further commented that when it comes to D&O policies, many New Zealand businesses tend to underinsure.

“It is estimated that larger organisations are under-insured by 50 percent. More than 75 percent of SMEs have no D&O cover, leaving the company and its management exposed to funding their own defence in the event of a claim.

Mr. Clark added, “New Zealand is becoming an increasingly litigious environment to do business. Individuals who make decisions on behalf of a company or who provide advice to their clients need to carefully consider how they manage their risk. They need to question whether they can adequately defend themselves should they be subject to litigation.”

AIG was the world’s first provider of management liabilities protection, and continues to offer market-leading D&O and professional indemnity policies to suit businesses and individuals at all levels.

The Steigrad ruling and the consequences for insureds
The Steigrad ruling concerned a dispute over whether former directors of the Bridgecorp companies could obtain an advancement of their defence costs under the companies' D&O policy in circumstances where those directors faced potential third party civil claims significantly in excess of the D&O limit. Their D&O policy, like most D&O policies within the insurance market, aggregated cover for liability and defence costs. Because the entire limit could be required to meet an award of damages and compensation in respect of the potential civil claims, the Court ruled that the whole "insurance fund" was subject to a statutory charge created by section 9 of the Law Reform Act in favour of the civil claimants. The D&O cover could therefore not be used to meet the directors' defence costs.

AIG is the world’s largest insurance organization, serving more than 88 million customers in over 130 countries and jurisdictions around the world. AIG businesses are market leaders in property casualty insurance, life insurance and retirement services, mortgage insurance, and aircraft leasing.

Additional information about AIG can be found at
www.aig.co.nz
YouTube: www.youtube.com/aig
Twitter: @AIG_LatestNews
LinkedIn: http://www.linkedin.com/company/aig

AIG Insurance New Zealand Limited was registered as Chartis Insurance New Zealand Limited prior to 30 November 2012.

ENDS

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