D&O Decoded

Directors should be mindful of their own insurance protection and potential exposure given the rising number of legal actions, reputational issues and changing pricing, writes Claire Stewart.

Australian insurers are in the news as they cast about for solutions to reform a directors and officers (D&O) liability insurance market under pressure from high-stakes securities class actions. Directors of large listed companies have tended to be the focus of these legal actions, but community and non-profit board members can suffer different, but no less stressful claims against them. According to recent Federal Court data, there are currently 76 representative proceedings underway nationally, with the bulk in NSW (44) and Victoria (21).

According to Show me the money! The impact of securities class actions on the Australian D&O Liability insurance market, a recent white paper by XL Catlin and Wotton & Keaney, the number of securities class actions in recent years has been growing rapidly from a low base, with nine actions in 2016 (the latest available full year data). Securities class actions accounted for 31 per cent of total class actions.

While no Australian securities class action has reached final court judgement, nine out of 10 have proceeded to a settlement, according to the report. The total value of settlements since 1999 is just over $1 billion with the total value of insurer contributions at just over $41b. Among the more high-profile recent cases are Bellamy’s Organic, Spotless Group and Myer. It’s a timely reminder to all directors to ensure they review the state of their own D&O insurance cover.

Safety net

A number of types of insurance fall under the D&O umbrella, but at its most general, D&O covers a challenge to decisions or actions made in the management of a company. Professional Indemnity, on the other hand, covers an individual expert or entity giving advice to a board or third party, which is then reasonably expected to rely on that advice.

Directors will usually be covered by an organisation’s policy but it is important for them to confirm coverage before they take their seat. Alternatively, individuals can seek their own personal director’s cover, which is portable, travels with them from board to board, and works to cover any shortfall in company insurance. D&O policies can cost anywhere from $1000 per million of cover for a smaller, unlisted organisation or community group, up to $30,000 per million of cover for a large listed company. It is a figure that is reportedly rising as litigation funders increasingly seek out highly insured companies to prosecute. Clifford Chance litigation partner Angela Pearsall says the risk landscape for boards has changed significantly in recent times.

“Many boards are grappling with new and emerging risks and how best to deal with them, including risks relating to data and IT, privacy, environmental liability, culture, disclosure and regulatory issues.”

For individual board members, running through a simple checklist (see breakout) should help determine if you need to top up your own protection with individual insurance.

Carole-Anne Priest, a lawyer, director and CEO of women-focused financial and insurance services group Imalia, suggests that potential directors ask to see a copy of the insurance policy before accepting a new board appointment. She advises to look for a Deed of Indemnity, which a company or organisation will give to its directors, and check the constitution to ensure the deed does not contravene company rules.

“Where new directors get into trouble — in small companies or not-for-profits particularly — is that they don’t understand whether the policy they have in front of them is an adequate limit of indemnity,” Priest says. “A lot of non-profits don’t have the funds to spend on that, so they might only be buying $1m of limited indemnity. An employee legal action could go through that, including the defence costs, very quickly.”

Employment practices is a growing area of contention where boards are finding themselves being sued — with issues arising around harassment, bullying, diversity and discrimination. “Make sure you know what those limits are as EPL [employment practices liability] can be expensive,” Priest says. “Some organisations will buy cover that includes it, some won’t.”

Pearsall suggests directors also consider issues including what happens if a claim is made retrospectively after a director ceases to hold office; whether a director’s legal costs will be paid if there is a conflict of interest between board members; whether they have the right to access documents from the company in the future; and what might happen in the event the company or organisation collapses.

For larger organisations, directors should look at exclusions around fines and penalties, Pearsall says. “It’s particularly relevant given Federal Treasury is in the process of completing a year-long review of ASIC’s enforcement regime, including strengthening penalties for corporate and financial sector misconduct.”

Regulatory investigations are also becoming some of the most serious faced by directors. Pearsall cautions that insurance will often only respond to an “investigation” if it meets certain criteria under the policy. “That may mean cover isn’t available unless the investigation is a formal one,” she says. “Some investigations may be informal, at least in their early stages, and other ‘investigations’ may never meet the criteria — such as certain inquiries, commissions or parliamentary committees.”

There are also questions around whether the costs of a company will be covered if it is compelled to investigate its own conduct before a formal investigation is launched by a regulator.

Be risk-aware

Priest says issues around the use of funds and inadequate compliance with financial reporting regulations (think the 2016 investigation into the Shane Warne Foundation) can apply to for profit and non-profit organisations equally. As well, the potential for cyber attack and data breaches (new legislation requiring disclosure came into effect in February), which carry expensive fines and reputational damage, should be considered.

“Have a think about where you believe the main areas of risk are, which should be part of your due diligence anyway,” she warns. “Ask questions. Sit with the CEO and ask, ‘If we ever have a claim, where do you think it will come from?’ They will know. The flip side is that if someone tells you, you actually have to do something about it.”

Size matters

The other difficulty is that for many cash-poor non-profit or smaller organisations, the prospect of upping their insurance limits is a moot point. In that case, directors might take out personal cover, which is particularly useful for those with a portfolio of positions. “If, for any reason, the company’s D&O policy can’t respond [because of exclusions] or the limit is too low, then your policy steps in just to protect you,” Priest says of Imalia’s Passport insurance.

And directors on the board of startups needn’t think they’re exempt. “A lot of investors won’t even look at you unless you’ve got a policy or insurance coverage,” Priest says. Using the excuse of being new and small won’t cut the mustard with potential investors. The same thinking applies for non-profits that are seeking donations, grants or government funding.

Check list

Directors should consider their D&O insurance carefully from the outset and review regularly. The AICD recommends you obtain independent legal advice about your D&O policy and the coverage it provides. Ask yourself these questions:

• Do I have a copy of the company deed of indemnity?
• Do I have a copy of the D&O liability insurance policy wording?
• Am I listed (by name or role) as an insured under the D&O policy?
• What risks, errors and claims does the policy cover me for?
• Does the policy cover me for the required period of time?
• Are the policy limits ($A) appropriate?
• Is the D&O policy the right product for me and my company — private, public, listed or not–for-profit?
• What are the common extensions to policy coverage and are there any needs specific to my industry or circumstances that should be specifically addressed in my D&O coverage?
• Are there any exclusions I am not comfortable with?
• What should I do when there is a claim?