A guide to directors and officers liability insurance

A helpful reference tool for all directors and officers is just being released by the Australian Institute of Company Directors

 A Guide to Directors amp; Officers Liability Insurance, co-authored by Colin Smith and Nancy Milne, provides information on various Damp;O policies and other relevant issues.

D&O insurance was once only dealt with by the person responsible for insurance. Today, it often makes it to the board agenda. In fact, many directors and officers insist on the company having satisfactory cover before joining a board. Directors should take an interest in the D&O insurance that is purchased for them. Some might consider that it's great to know that such protection exists but take little interest because "it won't happen to me". Most boards act with the utmost good faith at all times. However, if things go wrong the directors and officers may find themselves having to defend an unexpected and unwanted legal action. One of the most important aspects of D&O liability insurance is that it will cover the legal costs required for a director or officer to defend a legal action against them alleging that a "wrongful act" has been committed.

Directors and officers can of course be protected by indemnities from the company and we recommend that these be drafted as widely as is legally allowable. Without appropriate D&O insurance, the company's assets could be exposed to the costs of funding a legal defence or indeed an award of damages. The Guide provides information on the following insurance contracts:

• Corporate D&O liability insurance

• Supplementary legal expenses insurance

• Personal D&O liability insurance

• Personal D&O legal expenses insurance

• Former office holders insurance

• Statutory liability insurance Corporate D&O Liability Insurance

This contract provides blanket cover for all directors and officers of a company in respect of liability for damages or compensation together with associated legal costs. Directors and officers are given an understanding of the implication of some of the exclusions common to most corporate D&O liability insurance policies. Exclusions discussed include:

• Claims by one director or officer against another or by the company against a director or officer (insured verses insured),

• Claims brought against directors and officers by major shareholders,

• Claims arising from dishonesty or fraud,

• Claims arising from circumstances that occurred prior to the commencement of cover,

• Claims for bodily injury or damage to property,

• Claims for fines and penalties.

Insurance policies are available that have been specifically designed to fill some of the gaps created by these common exclusions. These too are discussed in the Guide. In some instances such additional insurance can be purchased by the company on behalf of directors and officers or, if the company is reluctant to do so, by individuals. Supplementary legal expenses insurance This contract provides protection for directors, officers and the company for some of the matters excluded from cover under corporate D&O insurance. The cover provided is only in respect of legal costs incurred in the defence of an action that alleges a wrongful act. Directors and officers can cover defence costs associated with:

• allegations under the Trade Practices Act 1974 and/or other consumer protection legislation;

• employment disputes such as harassment and discrimination;

• actions taken by the company, or director against director;

• actions by major shareholders;

• criminal prosecution and inquiry appearance costs, such as for occupational health and safety, environmental protection agency hearings and royal commissions; and

• allegations of infringement of intellectual property rights.

The company can cover defence costs associated with:

• indemnification of a director or officer for "wrongful acts";

• attendance at a criminal prosecution or inquiry; and

• employment disputes.

This cover can only be purchased in conjunction with a current corporate D&O insurance policy.

Personal D&O liability insurance

This contract is a personal insurance policy owned by individual directors or officers. It provides cover for legal defence costs and liability for awards of damages resulting from a wrongful act committed while acting in the capacity as a director or officer. As is the case with supplementary legal expenses insurance, this contract will provide cover for matters not always covered by corporate D&O liability insurance, such as:

• claims by another director or officer,

• claims by the company,

• claims by major shareholders,

• claims involving environmental issues, and

• claims involving occupational health and safety issues.

The insurance can be purchased to provide cover for all board positions held by an individual and can also provide cover for retired positions.

Personal D&O legal expenses insurance

This contract provides protection for circumstances similar to personal D&O liability insurance with one distinct difference - it does not cover awards of damages. There is now some uncertainty about the future availability of this insurance as the sole provider of such cover was HIH Insurance. Former office holders insurance This contract can be purchased by either the company, on behalf of directors and officers, or by individual directors and officers. It provides a retiring director or officer with the certainty that they will be protected for claims made against them in their retirement which related to decisions involving them during their time as a director or officer of the company. The policy will provide protection for a period of up to seven years after retirement. Statutory liability insurance It is common in most policies, including D&O policies, to exclude cover for fines and penalties imposed at law. Companies, directors and officers may be held liable for fines and penalties resulting from the acts of others or that result from an accidental breach of statute. While it is yet to be tested at law this contract of insurance provides cover for such fines and penalties together with associated defence costs. Other issues The Guide discusses a range of other issues including:

• access to company documentation and independent professional advice in the event of a claim after retirement.

• how and when notifications of circumstances/claims should be made.

• Directors' and officers' "duties of disclosure" when entering into a contract of insurance and ways of ensuring that correct disclosures are made on behalf of all insured directors and officers.

• Input and discussion aimed at assisting directors and officers in selecting the desired level of protection.

Conclusion

There are many D&O insurance policies currently available. In some cases more than one policy will be required to obtain suitable protection for the directors and officers. The decision on which policy(ies) to arrange requires considerable analysis and non-vested advice, aimed solely at achieving the best protection available in the circumstances prevailing at the time. It would always be recommended that, where possible, a minimum of corporate D&O liability insurance be obtained. Your company may be involved in an industry that makes both you and the company vulnerable to fines and penalties, such as those arising from occupational health and safety issues. You may wish to consider statutory liability insurance in conjunction with corporate D&O liability. You and your fellow board members may not be comfortable with some of the exclusions contained in your corporate D&O liability insurance. You may wish to consider the concurrent purchase of personal D&O liability insurance or supplementary legal expenses insurance to fill the gaps.

The final mix of policies will depend on prevailing insurance market conditions for D&O insurance. Clearly, directors and officers should be obtaining the best advice available, covering all known D&O insurance policies. It is not advisable for directors and officers to delegate total responsibility to another party for selection of the most appropriate D&O insurance. They need to understand in advance, what their insurance policies should do for them when a claim arises. After all it is their personal assets that are being protected.

*Colin Smith, a consultant-insurance and risk management for Clayton Utz and principal consultant of Strategic Insurance & Risk Solutions, Nancy Milne, a partner of Clayton Utz

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.