Australia: Am I covered? What to look for in your D&O insurance policy

WHO SHOULD READ THIS

  • Company directors and executive officers, in-house counsel.

THINGS YOU NEED TO KNOW

  • In some market segments, particularly for listed companies, significant premium and retention increases can be expected.

WHAT YOU NEED TO DO

  • Review your D&O insurance policy annually prior to renewal; and
  • Check the key aspects of the policy including limits of liability, retention levels and the scope of definitions dealing with insured parties, claims and losses covered.

Company directors and officers have a wide range of statutory and common law duties and responsibilities.  Failing to discharge those duties may expose a director or officer to legal action and personal liability from a number of sources. In our first article in this series, we look at who is covered under a Directors and Officers (D&O) Liability Policy and how it operates. 

Why have cover?

When making decisions on behalf of a company, even those taken with the utmost care, circumstances can arise which may lead to claims against company directors and officers.

These claims can come from a variety of sources including the company itself, other directors, shareholders, creditors, customers, employees, liquidators and administrators and regulators such as the Australian Securities and Investments Commission (ASIC) (who have the main responsibility for enforcing the Corporations Act) and Workplace Health and Safety authorities.

Most commonly, claims will arise from alleged breaches of the Corporations Act 2001, under which directors and officers can be prosecuted. For public companies, disclosure requirements under ASX listing rules is a very common class of claim from both ASIC and/or shareholders.

These claims may lead to a liability to pay compensation, a fine or a penalty. In addition, directors and officers will face exposure to the cost of defending these claims that can be significant.

Directors may be indemnified for claims against them by the company, either by a formal deed of indemnity, the company constitution, or both. However, often companies cannot or may not be willing to indemnify directors for all costs and liabilities and large claims may be beyond the financial capacity of the company to pay from available resources.

It is therefore critical that companies and their directors and officers have insurance cover that provides financial protection for such liabilities.

Who is covered?

D&O insurance is usually obtained and paid for by the company itself that is referred to as the Policyholder. The parties who are covered can vary from policy to policy, however the primary purpose of the policy is to cover an ‘insured person’.

‘Insured person’ usually includes any past, present or future director or officer of the company and can should also extend to employees while acting in the course of their employment.

What does the policy cover?

A traditional D&O insurance policy generally contains three types of cover for directors and officers and, in some instances the company itself.

  • The first provides cover to directors and officers for liability for wrongful acts committed in their capacity as directors and officers where the company is unable to indemnify them. This is known as Side A cover.
  • The second reimburses the company for claims made against the directors and officers by third parties for wrongful acts committed by them in their capacity as directors or officers for which it is legally permitted to indemnify them. This is known as Side B cover.
  • The third provides cover for the company itself, as distinct from its directors and officers, in relation to claims arising from wrongful acts associated with the offer, sale or purchase or trading of of its shares or securities.  This is known as Side C cover.

Side C cover is intended to protect publicly listed companies from claims against the entity itself which often include shareholder class actions involving the trading of the company’s securities.

An entitlement to cover will be triggered by a ‘Claim’. This is usually defined to mean a written demand for damages or some other legal remedy or a civil, criminal, administrative or regulatory proceeding by a third party against an insured person in their insured capacity or the company.

The financial loss covered by a D&O policy will usually include liability to pay damages and defence costs.  It can also include cover for civil pecuniary penalties and fines payable by the director or officer.

The definitions of what amounts to a ‘Claim’ and a ‘Loss’ under a policy will be critical to determining the scope of cover that is available and should be checked carefully to ensure that they are sufficiently broad for the activities of the company.

D&O insurance policies operate on a ‘claims made’ basis. This means that all ‘claims’ made against the company or directors during the policy period (which is typically 12 months) must be notified to the insurer, also during the policy period or any applicable extended reporting period.

In Part 2 of this focus series, we look at when claims and circumstances which may lead to a claim should be notified to the insurer.

What is excluded from cover?

A D&O policy will exclude cover for risks that either cannot be insured or which are covered by some other class of insurance.

In those categories, it is usual for a D&O policy to exclude cover for claims for fraudulent or dishonest acts by the insured person or company and wilful violation or breach of any law. However, such exclusions will usually not operate until the conduct in question is finally adjudicated by a court. This allows the advancement of defence costs by the insurer to the insured person so that they can defend themselves against the allegations.

Claims for bodily injury or property damage and claims arising from the rendering or failure to render professional services by the company or an insured person to a third party will also be excluded as these may be covered by other policies (general liability and professional indemnity respectively).

Prior known claims or circumstances relating to an act or omission which took place before the commencement of the policy and which could have been notified to an insurer under a previous policy will also be excluded.

A major shareholder exclusion excludes cover for claims brought by a party holding a specified level of controlling interest in the company (usually between 10% and 20%) or a board position with the company.

Limit of liability and retention

Coverage limits are specified in the policy schedule. The limit of liability is the maximum amount that the insurer will be liable for in the event of a claim, over and above any applicable retention.  The limit of liability is often inclusive of defence costs and investigation costs.

There will also be an annual aggregate limit of liability set out in the policy. This means that the overall amount of cover available during the policy period is limited to the specified amount, regardless of how many individual claims arise during that policy period.  There may also be sub-limits, which are limits within the overall limit of liability, that apply to certain classes of claim such as Workplace Health and Safety claims.

It is common for D&O policies to require that the company pay a ‘retention’ or deductible amount first, before the insurer is required to pay under the policy. Usually, these retentions only apply to side B and C covers, but can sometimes apply to side A direct cover.

If there is not a sufficient limit of liability available under the D&O policy situations may arise where the limit is eroded by one type of claim, with no further cover available for the balance of the policy period.

For example, if a D&O policy covers a company for a class action by shareholders under side C cover, the legal costs alone in defending such an action may erode the limit leaving no cover for any actual liability of the directors.

Care must be taken to ensure that the policy provides an adequate limit of liability, having regard to the nature and extent of the company operations and its perceived risks. Additional cover may be available under the policy or on a ‘top up’ basis.

State of the market

The market for D&O insurance has historically been cyclical with periods where broad cover is readily available at reasonable rates (soft market) and at other times, the cost is high with a narrower scope of cover available (hard market). The state of the market is influenced by a range of factors such as the number of insurers and reinsurers willing and able to provide capacity as well as by the prevailing claims environment.

The GFC and its aftermath saw significant inflows of capital into the insurance market seeking returns.  This generated heated competition for market share, expansion of the scope of cover and reduction in premiums and retentions. At around the same time this was occurring, there was also a progressive deterioration of the claims environment.  Inevitably, this has created significant pressure on insurer loss ratios.

The market conditions for D&O insurance for publicly listed companies is particularly challenging.  An increase in class action proceedings as well as the availability of litigation funding means that Australia is one of the most litigious jurisdictions outside the United States. The Hayne Royal Commission into the Banking, Superannuation and Financial Services Industry has also contributed substantially to rate increases of anywhere between 70 and 400 percent on both renewals and new business.

In order to address the deteriorating claim performance for companies in the financial services sector, insurers are looking to confine their Royal Commission liabilities to a single policy year by imposing an absolute exclusion on any future claims arising out of or connected with any matters within the terms of reference of the Inquiry.  Insurers are also seeking to impose increases in retentions and are generally taking a tougher stance on underwriting.

The market for D&O insurance for private companies is less volatile with a stronger insurer appetite for these risks, however insurers are seeking to impose premium increases to make up for losses incurred in other parts of their portfolios.

Overall, cover restrictions, premium and retention increases are occurring and longer lead times for marketing or re-marketing of cover are required to ensure optimal outcomes for all companies, public and private alike.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions