Directors and Officers Insurance - What is D&O cover?
A D&O policy has become an essential policy for company directors. There are generally three insuring clauses. D&O provides coverage to the individual Directors and Officers (Side A) or as a reimbursement to the company for its indemnification of these individuals (Side B). Entity (Side C) cover is when a claim is made by shareholders in a publicly listed company.
Who is Insured under D&O Insurance
A standard definition of an Insured Person includes any past, present or future director, shadow director, secretary, officer and employee. An Insured Person can include their estate, heirs and legal representatives.
Why purchase D&O coverage
Companies purchase D&O cover because managers can make mistakes. D&O coverage includes financial protection for managers against the consequences of actual or alleged “wrongful acts”. Policies protects the personal liability of company directors but also the reimbursement of the insured company for costs incurred by directors.
What types of risks does D&O insure
The types of risks that D&O insures include:
- Failure to comply with regulations or laws
- Decisions exceeding the authority granted to a company officer
- Mergers and Acquisitions
- Reporting errors
- Employment practices and HR issues
- Corporate manslaughter
- Competitor claims
- Shareholder actions
How does D&O cover operate
A D&O insurance policy reimburses the company for amounts payable by the company to directors. It provides direct coverage to directors for liabilities which are not indemnified by the company.
D&O insurance provides cover for Defence costs and investigative costs, costs to appear at inquiries and investigations and Judgments and settlements.
D&O Policy Exclusions - What is not insured
D&O insurance policies have exclusions as with all insurance policies. Exclusions vary between insurers and in some cases are less onerous, with separate additional coverage also available.
Policy exclusions in standard policies include:
- Bodily injury
- Fraudulent, Dishonest and Wilful Conduct
- Organisation v Insured
- Major Shareholder
- Insolvency exclusion
- Insured v Insured
- Prior known facts
- Professional Services
- Change in Control conditions
It is possible to obtain coverage from alternative policies for some of these exclusions.
D&O Insurance - The 'I know nothing' defence
As a director of a company, you will invariably be taking some risks that you do not know about. Directors act in the best faith for their company. Unfortunately however, everyone has a great rear view mirror. Even with the very best of intentions, irrespective of whether you are proven wrong or not, costs for inquiries, legal representations and damages can be substantial.
I quote a phrase which sums up these difficulties. Donald Rumsfeld, the 13th Secretary of Defense for the United States of America in a committee war hearing stated the following:
“Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.”
We don’t know the future, and with the best of intentions, we can all still get it wrong. If we knew the future, we would not need insurance. Do not expose your personal assets to undue risk. As a director, the buck stops with you.
As a company director, what should I do?
As an incoming director in order to fully appreciate your risks, you should:
- Obtain a full copy of your company's Directors and Officers Liability policy wording
- Confirm you are an Insured Person under the policy
- Request a detailed meeting with company legal representative or secretary, and your company's insurance broker to discuss the existing coverage
- Discuss the level of your limits, extensions, definitions, conditions and exclusions.
- Discuss the insuring of costs relating to representation at inquiries, even when no 'wrongful act' has been committed
- What is the process to follow if we have an incident?
- Have your Deed of Indemnity independently vetted by your legal representative
- Review the general committee meeting minutes, and the risk audit committee meeting minutes for the prior six to twelve months. If these are not supplied prior to your role, that is both a corporate governance and culture concern.
The CBA Chairman stated in the Banking Royal Commission it takes months on a board, before fully appreciating the issues. They subsequently advised that their briefing papers for incoming board members were improved.
Our advice is before taking the board position, to have a frank and open meeting relating to current issues. Do not accept future payment for your services, unless you have conducted full diligence of the company offering you the directorship. This can be translated to look both ways before you cross the road.
D&O Insurance market
The number of claims relating to D&O is increasing, and the amounts being paid have dramatically uplifted. This is evidenced from data released by Australia Prudential Regulatory Authority (APRA) that oversees all insurer operations in Australia.
Business Insurance Specialists Pty Ltd are able to review and provide terms for your Directors and Officer's insurances. As your business insurance expert, we are aware of the current insurance market demands being placed on insureds. Our role is to ensure you are provided guidance on the covers and costs accessible in the market. Contact us today.