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Defence Costs - Claim Examples

Exposure Exceeded Policy Limit

The insured is a firm of architects with professional indemnity insurance. The policy limit of indemnity was $1,000,000. During the period of cover the firm is served with proceedings alleging negligence and seeking $2.5M in damages.  The architects believed that they had some valid defences to the claim and that the quantum claimed was significantly overstated.  The insured notified the claim and expected VL to defend it.

However, as the potential exposure of the architects exceeded the limit of indemnity under its policy Section 9 of the Law Reform Act 1936 meant that the full $1M limit of indemnity must be preserved for the satisfaction of any judgment against the architects in priority to the provision of any defence costs. It effectively debarred the insured from accessing its professional indemnity policy.

This principle was determined by Supreme Court decision in BFSL 2007 Ltd v Steigrad [2013] NZSC 156.   

In the wake of this decision VL produced a solution to this dilemma by offering a separate form of policy which provides cover solely for defence costs in such an eventuality.  This policy indemnifies only defence costs and is unaffected by Section 9 of the Law Reform Act and the Supreme Court decision. 

The insured fortunately had this cover which meant that VL could pay for the claim to be defended and settled within the indemnity limit of the professional indemnity policy.

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