Author's Note: The discussion below is general and will be
subject to the exact terms of the insurance policy in question and
the exact parameters of the offending circumstances.
Under contemporary legislative schemes, directors and officers
are subject to the risk of substantial criminal or civil penalties
for acts that may be far removed from themselves, merely by virtue
of their position. A recent example of this in the context of
employment and safety law is the heightened responsibility and
penalty regime imposed on officers of "persons conducting a
business or undertaking" under harmonized workplace health and
There is a persistent risk inherent in holding a position as
director or officer. This risk is recognised in high salaries. To
some extent the company can mitigate the risk through purchasing
appropriate insurance policies, however Corporations Act
2001 (Cth) sections 199A, 199B and 199C prohibit a company
from providing its directors and officers with indemnity or
insurance to protect against a range of specific liabilities. Of
course, no insurance policy is of use when a jail sentence is
To the extent that the company does not, or is unable to insure
against the risk of certain liability actions, the residual risk
will be reflected in the directors' and officers'
remuneration. A director or officer can then purchase their own
insurance policies to cover this risk. Direct purchase by an
individual of D&O Policies will not fall foul of
Corporations Act 2001 (Cth) sections 199A, 199B and
D&O Policies generally recognise public policy and validity
issues through two types of clause: Dishonesty and Fraud Exclusion
Clauses, and Hammer Clauses.
DISHONESTY AND FRAUD EXCLUSION CLAUSES
The general form is that the policy will not respond where the
offending circumstance was wilful, dishonest, fraudulent,
malicious, or otherwise conducted with criminal intent.
However, the clause/exclusion will only apply to the extent that
the conduct has been established as such by an express admission,
Court judgment or other final adjudication.
An insurance provider will generally fund litigation up to the
point where a final determination falls within these types of
Any funds advanced to cover legal fees up to this point will
generally then become a debt owed by the insured to the insurer. It
will be a purely commercial decision as to whether the insurer will
seek to recover these amounts.
The discussion above illustrates a potential perverse incentive,
whereby a director or officer is compelled to expend a
disproportionate amount of insurance money to defend a relatively
minor penalty, or risk having to bear the cost themselves if found
A hammer clause allows the insurance company to step in over the
wishes of the policy holder and make a commercial decision to
settle the matter where settling will incur less expenditure than
defending the matter.
The Courts generally uphold the validity of hammer clauses,
partly because they promote the efficient resolution of Court
Therefore, when a matter is settled under a hammer clause, the
D&O policy will remain valid despite the adverse finding.
There are competing public policy considerations that support
the legality and enforceability of D&O Policies. Further, most
contemporary D&O policies have already been structured to avoid
falling foul of the adverse public policy considerations.
Structuring an appropriate risk mitigation scheme is vital to
protect against personal liability and is often a balancing act
between competing considerations.
While there is value in consulting with a legal professional on
the ultimate legality and enforceability of your company's risk
mitigation scheme, it is not time to panic.
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.
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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