Directors need to think about emerging risks

Serving on a Board has Never Been so Risky                        


Risk management is now an important boardroom concern. Against a backdrop of almost unparalleled financial instability, corporate crises, increasing regulation and public resentment over the perceived power of business executives, rarely have directors of large companies (especially in the financial services sector) been the subject of more scrutiny.
There are some important issues to consider before joining a company’s board of directors. You must consider that your personal assets are ultimately at stake. Very few Directors and Officer’s Liability have a high enough limit. Especially when the one limit is shared by all the Directors AND Officers.
Courts generally take the view that directors have a duty to gain a sufficient understanding of the nature of all the major risks facing their businesses. Risk management is an often neglected area with Boards of Directors. Very few of them have appropriate plans in place for their risk-taking and appetite for risk. Directors are increasingly asking what the proper role of boards is in corporate risk management. More and more, they are expected to be ultimately responsible but rarely have the skill and knowledge.
Directors should be concerned with cyber risks. If they cannot demonstrate the have considered these risks and how to manage them, they can be considered to be breaching their duty of care to affected Stakeholders. In 2011, companies of all sizes struggled with cyber incidents. These ranged from first party losses with web sites and intranet systems being brought to a stand-still to third party matters such as breach of privacy. These came from external and internal intrusions including cyber crime. These new financial risks may not be covered under standard insurance policies. Therefore directors and risk managers must ensure that their Insurance Broker buy appropriately tailored policies that provide protection against this rapidly expanding area of risk to which they are vulnerable.
Then there are the expanding risks of government investigations from many different authorities such as ASIC, ACCC, Fair Work Australia and Workplace Health and Safety. The costs incurred by these investigations require legal representation can often run into millions of dollars. But there is doubt whether some of the costs incurred in responding to such investigations are covered by D&O insurance.
For some Directors, they are also exposed to overseas risks. Directors and officers are looking more closely at the language and enforceability of their D&O policies and questioning whether the traditional one global policy approach to insuring D&O liabilities adequately covers them.
The D&O insurance market has increased its capacity. This includes a number of new insurers entering the market offering excess layers. More capacity and increasing competition has the effect of keeping pricing of D&O insurance relatively stable. This is despite the global economic turmoil and a more litigious society demanding accountability of Business leaders.
The D&O policy has to move with the times, as brokers seek cover for new and previously untested areas of liability. However, not all insurers are moving in the same direction. It probably calls for Insurance Brokers to direct these needs on behalf of clients towards Insurers.

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