What does director and officer insurance cover?

Ensuring you have the appropriate D&O insurance in place is more important than ever, given the widening of risks directors face and their potential liabilities under Australian law. 

Directors and Officers (D&O) insurance covers the defence costs and settlements of proceedings against directors and officers, except when those claims result from fraud, dishonesty, wilful default or insolvency.

According to industry experts, key areas where the risks of being sued are currently higher include cybersecurity, modern slavery and human rights violations, money laundering, environment social and governance (ESG) issues, geopolitical instabilities and economic uncertainties. Also on the list are climate change and issues such as greenwashing, greenhushing (when organisations deliberately under-report or hide their green credentials to evade scrutiny) and disclosure.

Michael Herron, managing director of specialisms at Gallagher Australia, adds that a new “top-tier” risk is AI, especially around accuracy and reliance. He also warns of the potential fallout of regulatory scrutiny of high-risk sectors like data, payments, consumer, health and gambling.

Guy Narburgh, special counsel at Herbert Smith Freehills, agrees, noting that the regulators, particularly the Australian Securities and Investments Commission (ASIC), are heavily focused on compliance, especially when it comes to climate disclosures and cyber risks.

“ASIC has recently made a couple of public statements about actively seeking out companies that are not cyber-resilient for action — and that could include enforcement action against individual directors,” says Narburgh. “Many claims that have been backed by plaintiff law firms often start with a regulatory issue. The big spectre is often class actions.”

He warns there could be a change in the types of class actions directors face. “For a long time, securities and shareholder class actions were a big focus, but you will have seen expansions into cyber- related, employment and consumer class actions.”

Narburgh adds that a key risk for directors in the context of class actions is reputational. “Someone will be poring over decisions the directors made or the evidence they gave in a trial, exposing them to the public glare,” he says, noting that an area that sometimes brings various risks together is complex supply chains. “We’re no longer in a world where our businesses are self-contained. Businesses are now intimately connected and supply chains can be hit by cyber or slavery issues.”

But how to ensure you get adequate cover?

Back to basics

A good place to start is to download the AICD director tool — D&O insurance for non-executive directors which discusses what’s covered by D&O insurance and what is not.

The tool explains the many aspects of this insurance, including the deed of indemnity, an agreement between a company and a director whereby the company indemnifies directors against liabilities or legal costs incurred in their capacity as a director. The tool also has tips on how to approach the D&O market and make a claim.

There are two main forms of D&O cover. Side A cover provides cover directly to an insured director or officer for liabilities incurred by them personally because of their role as a director or officer. This includes defence costs, damages or compensation, interest and costs awarded against the director or officer. Side B cover covers the company for money spent in indemnifying directors or officers covered by a deed of indemnity. For ASX-listed entities, there is also side C cover, for liability for a “securities claim” such as a shareholder class action.

The landscape

Narburgh says Australia experienced a tumultuous D&O market between 2017–22, with huge increases in D&O premiums. This hardening of the market resulted from the huge number of class action claims insurers had to pay out. “Historically, they hadn’t expected this, so they hadn’t charged the market the premiums they should have,” he says.

But the Australian D&O market has improved. “We’ve had several new insurers come into the market lately competing for business,” says Henry Clark, head of professional and executive risks at Honan Insurance Group. “The London market has also been actively looking at Australian D&O insurance. On average, over the past six to 12 months, premiums have gone down by 10 per cent.”

Narburgh says there is a lot more availability in limits. “Deductibles are also reducing [but] this doesn’t seem to be directly correlated with any actual or perceived reduction in the underlying risks. If anything, the risks are the same as they were for shareholder class actions or regulatory actions. It is a case of insurance market dynamics.”

Herron believes it’s a good time to trade or buy back coverage lost in the difficult trading period. “Everything is back in play for indemnity limits and deductibles, to delete unwanted exclusions, improve coverage and optimise the placement with the highest-quality insurers in terms of their security, underwriting track records, claims-paying history and capability.”

He adds this is also true for side C cover, which some companies stopped buying when it became too expensive. Clark agrees, noting, “This market is starting to become a buyers’ market or it’s starting to soften. Side C capacity is readily available. We’re seeing some organisations looking to bring side C back onto the program or potentially increase their side C limits.”

Getting covered

Clark recommends working closely with an insurance broker and placing coverage with insurers experienced in managing D&O and securities litigation in Australia, and not necessarily taking the cheapest option. He believes in meeting with the panel of insurers and building out a comprehensive underwriting submission and a detailed presentation clearly outlining how you’re managing your risk profile. However, he cautions, some new players in the market haven’t been tested yet. “Ultimately, if a claim does arise, you want to ensure you have the support and expertise of insurers and their claims teams for your response.”

Narburgh also notes differences in some of the available covers. Some insurers are well- established and understood in Australia, but some of the newer players may not be providing quite as much coverage. “It’s a case of understanding what you’re getting for your dollar,” he says. “In a hard market, you should work hard to preserve the breadth of the cover, but in a softer market, there may be opportunities to expand the scope of that cover. If insurers are trying to grow their market share or increase their premium income, they may be willing to expand their coverage. If you can show you have high-quality underlying risks in place, you may be able to distinguish yourself from other risks in a good way and hopefully reduce your premiums.”

Simon Levy GAICD, CEO and company secretary at the Risk Management Institute of Australasia, notes that insurers aren’t just reacting to emerging risks. They are proactively addressing them through data-driven insights, diversifying their risk portfolios, adopting climate-conscious strategies, innovative product development and rigorous scenario planning and stress-testing.

“For many insurers, these advanced risk management tools and strategies can provide directors and officers with valuable insights into potential emerging risks,” he says. “In times of uncertainty, the relationship between insurers, underwriters and clients isn’t just meaningful, it’s foundational. Trust, transparency and tailored solutions become cornerstones of mitigating risks and navigating them confidently.”

This article first appeared under the headline 'Don’t Take The Risk’ in the February 2024 issue of Company Director magazine.