With greater corporate governance and increased regulatory surveillance today, company directors and officers, whether they are acting in a part-time, honorary or non-executive capacity, are under increased pressure to carry out their duties and obligations meticulously. Failure to do so may lead to personal liablilty for the individual director or for the entire board of directors.

All company directors and officers are exposed to potential litigation irrespective of the size and type of corporation in which they are involved.

SOME COMMON QUESTIONS ASKED ABOUT DIRECTORS' AND OFFICERS' INSURANCE

1. What is Directors' & Officers' (D&O) Insurance?

D&O is the short-form phrase for directors' and officers' liability insurance. The policy is designed to protect the personal assets of directors and officers by providing indemnity for any loss arising from a claim as a result of a 'wrongful act' committed by them in the course of performing their duties.

2. What does a 'wrongful act' mean?

We difine a 'wrongful act' to include an actual or alleged breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty of authority or other act done or attempted by, or any other matter claimed against, a director and officer while acting in that capacity.

3. What is the normal structure of a D&O policy? What is the meaning of Insuring Agreements A & B?

Generally, the operative clause of a D&O policy will be divided into two parts:

(a) Insuring Agreement A - directors' and /or officers' liability provides cover to directors and officers in respect of claims made personally against them and for which the company cannot, under its indemnification provisions, provide indemnity to the individual.

(b) Insuring Agreement B - company reimbursement enables the corporation to be reimbursed in situations where it has granted indemnity to a director or officer in respect to a claim.

4. Who is covered under a D&O policy?

A D&O policy protects directors and officers of the corporation and all its subsidiaries. The CGU Professional Risks Insurance D&O policy will cover any natural person who was or now is or may hereafter become a director, secretary, executive officer, or employee of the corporation, whether or not validly appointed or anthorised to act in this position.

The definition is intentionally broad to ensure that it protects any individual exposed to potential litigation. The operation of the definition ensures that changes to the board do not need to be notified to enable coverage to be afforded. The policy will automatically respond to such changes.

As long as the corporation continues to purchase a D&O policy, all retired and newly appointed directors will be automatically protected.

5. Does the D&O policy cover corporation?

Generally, a D&O policy will not indemnify the corporation for any claims against it. The intention of the policy is to indemnify the directors and officers for a wrongful act committed by them in their capacity as a director and officer. It is intended to protect the assets of the individuals, not the Corporation. The policy limit is intentionally made available for actions brought against individuals and will not be eroded by claims against the corporation (other than EPL matters described below).

Insuring Agreement B will, however, reimburse the corporation where it has indemnified its directors and officers.

There is an optional extension under the policy, for the corporation to purchase protection for employment practices liability (EPL) claims brought against the corporation. Our experience over the years has shown that that EPL claims are frequently made against an individual as well as the corporation.

6. Why is it necessary to fill out a proposal form and to supply the financial details of the company?

The information provided in the proposal form is pertinent to the risk assessment of the corporation and its directors and officers. It enables the underwriter to gain an understanding of the individuals that CGU Professional Risks Insurance will be protecting.

In addition to the information contained in the proposal form, an underwriter needs to understand the financial position of the corporation. Underwriters will request the audited consolidated financial statements for the past two financial periods. Unaudited financials, if accompanied by a signed director's statement, will be accepted.

7. What are some common types of claims brought against directors and officers?

Directors are in a position of great power and responsibility and have been held to be increasingly accountable for the welfare and actvities of the corporation as a result of that position. Sources of claims include:

• Breach of duty/neglect
• Trade Practices/Fair Trading Legislation
• Insolvent trading under Section 588G of the Corporations Act 2001 (Cth).
• Mergers and acquisitions (misleading and deceptive conduct).
• Shareholder disputes
• Employee claims (unfair dismissal, discrimination, sexual harassment).
• Unions/members (defamation).
• Regulatory authorities (ATO, ACCC, anti-discrimination boards, etc).
• Federal and State Government offices
• Breach of contract

SOME DIRECTORS' AND OFFICERS' INSURANCE CASES

1. Breach of Duty - Facts: The insured directors were sued by a disgruntled minority share holder who alleged that he did not participate in the second share allocation because he was given some misleading information about the future of the company.

The Statement of Claim alleged that the insureds had breached their duty to the shareholders and contravened Section 52 of the Trade Practices Act. After a three day hearing, the case was settled with each party agreeing to pay their own legal costs. The D&O policy responded and paid the insured's legal costs of $150,000.

2. Insolvent trading claim - Facts: The insured was appointed a director of a company. The company went into liquidation, after trading for six months. It was held that if the insured had been more diligent in carrying out his duties as a director he would have appreciated that the company was continuing to trade whilst insolvent.

The insured was held to have contravened Section 588G of the Corporations Law, by allowing the company to trade whilst it was insolvent and therefore liable to its debts.

3. Discrimination - Facts: A female casual factory worker, the complainant, and the company's head foreman commenced a sexual relationship. At the end of the relationship the female worker alleged that she had been pressured into the relationship in order to get the hours of work that she wanted. She also complained that her rostered work hours had been dramatically reduced following the end of her relationship.

The complainant lodged a complaint with the Anti-Discrimination Board against the insured, a company director and the company itself, alleging that she had been sexually discriminated against. The matter was settled for $20,000 plus legal costs of $8,000 before the Board considered the allegations.

4. ACCC Investigation - Breach of Trade Practices Act - D&O Automatic Extension 2.6 - Facts: The insured, a director of a local hospital, received an application for a cosmetic surgeon seeking admitting rights for his patients to the hospital.

The application was refused because the hospital did not want to practice in the ares of cosmetic surgery. However, the doctor claimed that his application had been refused because the other surgeons using the hospital felt that they would face competition from the cosmetic surgeon. He claimed that the director of the hospital and the other surgeons had engaged in anti-competitive behaviour in breach of the Trade Practices Act.

The doctor lodged a complaint with the ACCC. The Commission commenced an official investigation into the allegations. The commission's investigation established that the hospital and its director had not breached the Trade Practices Act. The policy responded picking up the insured's legal costs of $60,000, which included costs for four witnesses and counsel fees for attending the hearing.

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