Directors & Officers Liability
What Does Directors and Officers Insurance Cover?
Directors' and Officers' insurance compensates directors and officers for loss, including legal costs, where they have committed a 'wrongful act' while carrying out their role as managers of the corporate entity.
A wrongful act is usually defined as an error, mis-statement, misleading statement, conduct, omission, neglect or breach of a duty of care.
This insurance is a personal cover for directors and officers. The only indemnity available to the corporation is for its obligations to reimburse legal costs for its directors and officers should they be found not liable.
Why do you need it?
Not only are there are specific duties and responsibilities imposed on directors as to how they conduct a business, they have more than 600 laws and regulations they must follow. This is on top of the responsibilities imposed under common law and contract conditions. In nearly all circumstances, the individual director or officer will be made personally liable.
Who is covered?
Directors & Officers Liability insurance covers the decisions made by people involved in managing and running an organisation. It is important to note that it covers the individuals not the company. The people generally covered include:
- past, present & future natural persons
- a director, secretary or executive officer
- an employee involved in the management of a company
As per Section 199 of the Corporations Act, the Company can indemnify the individual Directors for reimbursement of their legal costs only where the Director has not been found liable and then they can claim under the Company Reimbursement section.
Duties of a director include:
- manage the company
- pay the company’s expenses
- borrow money on the company’s behalf and secure the repayment of that money
- act honestly
- be reasonable, careful and diligent
- use information acquired through your office for the company’s benefit
- use your position for the company’s benefit
- disclose any interest in any contracts with the company
- state whether or not the company’s profit and loss account and balance sheet give a true and fair view of the company’s position
- report on and review the results of the company’s operations during the relevant accounting period and any significant changes in the company’s affairs during that period
- prevent the company from trading while it is insolvent
- disclose any errors or matters warranting disclosure in a prospectus
- take care to see that the company does not breach the provisions of the Trade Practices Act or Fair Trading Act; anti-discrimination legislation; occupational health & safety legislation; environmental legislation and legislation that relates to the specific industry or industries in which the company trades.
Where do claims originate?
- Internally within the company itself, shareholders and / or employees
- Externally from customers, competitors and / or creditors
- Regulatory authorities such as the ACCC (as per the Australian Consumer Law), Australian Taxation Office, Occupation Health & Safety Legislation, Environmental Protection Agency, Crimes Act and ASIC.
Additional cover can be purchased to insure for:
- Supplementary legal expenses for defence costs for claims against the corporation for EPA or OH&S prosecutions
- Securities cover (Side C) for claims against the entity relating to Shareholding issues.
- Employment practices liability against the entity for defence costs and settlement of employment related matters such as wrongful dismissal, discrimination, harassment etc.
How Much Cover Is Enough?
A guide to determining the amount of insurance cover needed is to estimate the worst possible outcome of a mistake made by a director or officer of the company.
Other factors to be considered are legal trends and the effects of inflation on the settlement amount if the claim is not resolved for some years. This last point is important as the amount of cover purchased in the year that the event was reported may not be sufficient if the claim does not settle for many years.
The policy limit selected includes cover for costs and expenses incurred in the defence of the claim. For example, if the policy limit is $5 million, and the claim settles for $4.8 million with defence costs of $700,000 having been incurred, the directors and officers would be uninsured for the amount in excess of the $5 million policy limit (i.e. $500,000).
Who can help?
An insurance broker's role is to act as your representative and work in your interests, seeking the best cover at the best price for you from market knowledge. Call a good one. Call CPR – Experts who will save you.