Directors & Officers (Product) Insurance
Increases in corporate governance and regulatory surveillance mean that company directors are under greater pressure than ever before. Failure to carry out their duties and obligations may lead to personal liability for the individual director or the entire board of directors. All company directors and officers are exposed to potential litigation irrespective of the size and type of corporation that they represent.
Some common questions asked about directors and officers insurance
1. What is directors & officers (D&O) Insurance?
D&O is designed to protect the personal assets of directors and officers. It provides 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 is the definition of a 'wrongful act'?
A 'wrongful act' is defined as an actual or alleged breach of duty, breach of trust, neglect, act of error, misstatement or misleading statement, act of omission, breach of warranty of authority or other acts done or attempted by, or any other matters claimed against a director and officer while acting in their capacity.
3. What is the normal structure of a D&O policy? What is the meaning of insuring agreements A & B?
Generally speaking, 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. A 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 authorised 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 are automatically protected.
5. Does the D&O policy cover corporations?
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. 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 the D&O policy 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 activities of the corporation as a result of that position. Sources of claims may 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 - Background: The insured directors were sued by a disgruntled minority shareholder who alleged that they did not participate in the second share allocation because of misleading information given to them about the future of the company.
The claim stated that the insured parties 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 AUD$150,000.
2. Insolvent trading claim - Background: The insured was appointed a director of a company. The company went into liquidation after trading for six months. It was stated that if the insured had been more diligent in carrying out their duties as a director they would have appreciated that the company continued to trade whilst insolvent.
The insured was held to have contravened Section 588G of the Corporations Law, by allowing the company to trade while insolvent and therefore liable to its debts.
3. Discrimination - Background: A casual factory worker, the plaintiff, and the company's head foreman commenced a sexual relationship. When the relationship ceased the worker alleged that they had been pressured into the relationship in order to get desired working hours. The plaintiff also complained that their rostered work hours had been dramatically reduced following the end of the relationship.
A complaint was lodged with the Anti-Discrimination Board against the insured, a company director and the company itself, alleging that the plaintiff had been sexually discriminated against. The matter was settled for AUD$20,000 plus legal costs of AUD$8,000 before the Board considered the allegations.
4. ACCC Investigation - Breach of Trade Practices Act - D&O Automatic Extension 2.6 - Background: The insured, a director of a local hospital, received an application for a cosmetic surgeon seeking admission rights for one of their patients to the hospital.
The application was refused because the hospital did not want to practice in the area of cosmetic surgery. However, the doctor claimed that their application had been refused because the other surgeons using the hospital felt that they would face competition from the cosmetic surgeon. It was 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 Australian Competition and Consumer Commission (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 AUD$60,000, which included costs for four witnesses and counsel fees for attending the hearing.
Get in touch for more information
Contact Midas Insurance today on 1300 664 272 to have a member of our expert team assist you in choosing the right D&O insurance that meets your needs.