New Zealand: A Cautionary D&O Insurance Tale

If you run an international business, take heed. The latest ruling by New Zealand’s Supreme Court is a cautionary tale of how unpredictable director and officer liability insurance can be on the international stage.

The tale begins with the failed New Zealand property development group, Bridgecorp. As is often the case when a company goes bankrupt in a spectacular fashion, the company’s bankruptcy receivers sued some of the former directors for having breached their fiduciary duties.

The next chapter in this tale was equally predictable: as we would anticipate, the former directors of the company sought to use their D&O policy to cover their legal defense costs. After all, the D&O policy was purchased to respond to exactly this situation.

There can be no doubt that both the carrier and the directors understood the NZD $20 million limit was to fund both the defense and settlement of claims brought against the directors.

Unfortunately, what followed was a dramatic plot twist. In a turn of events that will turn the stomach of every thoughtful director,  the Bridgecorp receiver went to court and asserted a “charge” under New Zealand’s Law Reform Act of 1936.

Specifically, as reported by the New Zealand Herald, the receivers “claimed they had a ‘charge’ over the money payable and were concerned that if the directors could access the funds for defence costs, less insurance money would be there for investors under the policy if the claim against the board members succeeded.”

Surprisingly, the court agreed with the receivers. In December 2013, the New Zealand Supreme Court ruled the directors would not be able to access the policy to fund their defense, because doing so would reduce the amount of proceeds that might be available for the plaintiffs if they were to prevail.

So here we have happening exactly what directors fear might happen: the policy that they purchased to protect them failed to do so. So the question is: Are you prepared for international rulings when it comes to your D&O policy?

What We Can Learn from Bridgecorp

Outside the U.S., rulings are unpredictable. What’s more, many D&O policies come with language that says the policy will respond worldwide; but what many policyholders do not take into account is the local jurisdiction’s view of how the policy should be deployed.

Could something like Bridgecorp happen to your company? As a company with subsidiaries “Down Under” and beyond, it’s crucial that you work with an insurance broker that has expertise in international issues – especially since there is a Bridgecorp-like case making its way through the Australia courts right now.

Consider the following:

• If you have directors and officers in New Zealand or Australia, talk to your insurance broker about your policy options.
• Examine the corporate protections available to your directors and officers worldwide.
• Know the current insurance environment in the countries where you have subsidiaries.

Remember, experience matters. Make sure the insurance broker you work with routinely deals with claims worldwide. Most importantly, you want to ensure that you can have directly, timely access to your broker’s international knowledge so that you can smoothly and efficiently deploy a global insurance risk management strategy – one that will actually work as you expect it will.

In my next post, I’ll further discuss how to best assess international risk, and what to look out for when selecting a partner to do so.