The treatment of defence costs and their impact on the limit of indemnity differs from jurisdiction to jurisdiction
With the increasing globalisation of companies comes a corresponding increase in the number of jurisdictions in which directors of those companies may face claims. It is therefore important for directors to know what their directors' and officers' (D&O) liability policies cover, particularly as regards defence costs, as many jurisdictions treat defence costs and their impact on the limit of indemnity differently.
England and Wales: The courts of England and Wales have generally taken a relatively subjective approach, relying on the precise wording of the policy to determine how defence costs are treated. For example, in Wyeth v Cigna (2001), it was held the policy must expressly cover defence costs and the liability only arose once coverage for the underlying claim had been established. Conversely, in Poole Harbour Yacht Club (1997), the insured was entitled to defence costs before liability had been established, subject to the insurer's consent. Whether or not defence costs form part of the limit of indemnity, or sit on top of it, is also generally decided by considering the policy wording.
New Zealand and Australia: Both New Zealand's Law Reform Act 1936 and Australia's Law Reform (Miscellaneous Provisions) Act 1946 place charges over insurance monies which are, or may become, payable in respect of an insured's liability to pay compensation or damages, but the two jurisdictions take different approaches to the impact of defence costs on the charge.
The Australian case of Chubb Insurance v Moore (2013) held the statutory charge would not be affected in relation to defence costs until a judgment, award or settlement was made. In theory, directors could therefore erode the entire limit of indemnity with defence costs, leaving payment of the claim to fall to the insured.
In New Zealand, however, the Supreme Court held in Bridgecorp (2013) the charge attaches when the event giving rise to the claim occurs, even if liability is not yet established. Any defence costs which may exceed the policy limit are therefore advanced at the risk of the insurer and defence costs sit on top of the limit of indemnity.
US: In MF Global (2014), a bankruptcy case, it was argued the D&O policy sum should be reserved for the company's debtors, with a small capped sum available to the directors to fund their defence. However, the court held the insureds were entitled to the full amount of the D&O insurance proceeds, with a fractional sum being reserved for reimbursement of future indemnification payments by the bankruptcy estate.
Germany: In Germany, the limit of indemnity and defence costs are dealt with by the Insurance Contract Act and the German Civil Code, which prohibit the inclusion of defence costs within the limit of indemnity. Defence costs are therefore paid over and above the policy limit.
Given the varied approach to defence costs across jurisdictions, it is difficult to purchase a product that will offer the same cover in all instances. It is therefore important for directors and officers who may face claims in different jurisdictions to consider the wordings of their policies, as well as the rules of each relevant jurisdiction, to ensure they understand exactly what will be covered in the event of a claim and avoid any unwanted surprises.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.