Directors' and officers' liability insurance
("D&O insurance") provides cover for
company directors and officers from claims that might arise from
decisions taken when performing their role.
WHAT TYPES OF CLAIMS WILL D&O INSURANCE COVER?
The precise claims that will be covered will always depend upon
the wording of the policy. Generally, D&O insurance policies
are obtained to cover several risk scenarios, including the
negligent acts by directors and officers;
employment and industrial relations issues;
litigation commenced by shareholders;
reporting errors; and
unintentional failures to comply with regulations.
Many D&O policies will also provide advance cover for the
costs associated with defending claims, such as legal fees.
WHAT WON'T BE COVERED BY D&O INSURANCE?
Generally, D&O insurance will not cover loss that arises
from fraud, dishonesty, criminal acts or intentional breaches of
legislation or regulations. If only certain directors have engaged
in such conduct, but innocent directors are also the subject of a
claim, then the innocent directors will usually remain covered by
PARTICULAR ISSUES RELATING TO D&O INSURANCE
POTENTIAL PLAINTIFFS SEEKING ACCESS TO POLICIES BEFORE
Recently, a number of potential plaintiffs have sought court
orders allowing them to inspect the D&O insurance policies held
by the company they intend to sue. This enables them to assess the
commercial viability of commencing proceedings.
For example, if the potential plaintiff's claim is for a
significant sum of money and the company doesn't have a policy
that will cover the claim, then this is likely to mean the
plaintiff won't proceed with the claim.
As a general rule, a court won't compel a defendant to
disclose their insurance policy as part of any litigation because
the defendant's ability to pay any judgment is irrelevant to
the issues in dispute.
However, in recent years, the courts have allowed some potential
plaintiffs access to D&O policies for the purpose of deciding
whether to issue proceedings. Almost all of those potential
plaintiffs were shareholders of the company who relied on section
247A of the Corporations Act 2001, which allows shareholders to
apply to the court for an order authorising the inspection of the
Applications for access to D&O policies made under other
legislation have been unsuccessful.
D&O policy holders need to be aware of the risk that
potential litigants (especially if they are shareholders) may be
granted access to the policy in order to determine whether
litigation will be worthwhile. If the policy sufficiently covers
the potential claim, then the chances of litigation being commenced
PLAINTIFFS PREVENTING POLICY FUNDS FROM BEING USED TO DEFEND
Many D&O policies will provide advance cover for any legal
fees necessary to defend a claim. The defence costs available to
the insured will usually be limited to the indemnity available
under the policy as an aggregate amount.
Plaintiffs have previously attempted to obtain court orders to
prevent directors from accessing funds to defend the claim because
this will deplete the funds available to meet the claim. This was
successful in a New Zealand court but so far, Australian courts
have allowed defendants to access the insurance policy to defend
In considering whether a D&O insurance policy is right for
your business, you should consider whether it will also be
necessary for the policy to cover the costs of defending
proceedings and, if so, businesses should ensure that the terms of
the policy are clear when it comes to payment of defence costs
because policies that are silent on the issue may be open to
ENSURING SHADOW AND DE FACTO DIRECTORS ARE COVERED BY THE
Sometimes, a person can liable as if they are a director. This
can occur when:
The person has enough influence over a majority of the
directors of the company to be able to influence company decisions
(a shadow director); or
The person performs the tasks of a director even though they
are not formally appointed (a de facto director).
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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