One of the primary benefits of D&O insurance is that it offers financial protection to directors and officers facing legal action. In the event of a claim, the insurance policy can help cover legal defence costs, settlements, and judgments. This is especially important as legal expenses can quickly add up, and the personal assets of directors and officers may be at risk without adequate insurance coverage. Note that legislation has recently changed, which limits the extent that insurance can pay towards fines and penalties.

Have a look at our “how does D&O insurance work” article to understand how a D&O policy responds.

One of the key advantages of ML insurance is its extensive scope of coverage. In addition to the protection offered by D&O insurance, ML insurance encompasses a wider range of risks. This includes coverage for employment practices liability, which protects against claims related to wrongful termination, discrimination, harassment, and other employment-related issues. ML insurance also provides fiduciary liability coverage, which addresses claims arising from breaches of fiduciary duties, mismanagement of employee benefit plans, and other similar exposures.

Scope of Coverage: D&O insurance provides coverage for personal liability, including claims related to negligence, errors, omissions, breaches of fiduciary duty, and misleading statements made by directors and officers. ML insurance can cover a broader range of coverage for multiple liability exposures faced by the management team, such as employment practices liability, fiduciary liability, and crime liability.

Because KBI are specialists brokers in a specific industries, our specialised experience and expertise equips us to assist you in seeking suitable premium rates for your business.

At KBI, we understand that every business is unique and has specific insurance needs. Our dedicated team of insurance brokers will work closely with you to understand your risk profile and design customised insurance solutions tailored to fit your needs. We have deep industry knowledge and access to a wide network of insurance providers, allowing us to be more effective in negotiating for more competitive premiums.

Staying informed is crucial in navigating the insurance landscape. At KBI, we provide regular product updates and industry insights through our communications channels, including our website and blog. We keep you informed of changes in the insurance market, emerging risks, and best practices to empower you with the knowledge needed to make informed decisions.

• Board composition,

• Industry sector and the business cycle (start-up versus established businesses),

• Corporate governance,

• Financial information (e.g. the presence of significant debt on the balance sheet and restrictive covenants/terms);

• Foreign jurisdiction exposure.

These factors influence the insurer’s threshold decision – to offer terms or not, but also affect the terms and exclusions applicable to the policy.

• Scheduling underwriter meetings either face-to-face or via Zoom,

• Ensuring that the right business representative is in the meeting to answer questions about the business fundamentals,

• Being on the front foot with cash flow forecasts and strategy updates.

i. Side A Coverage – Directors & Officers / Insured Persons
ii. Side B Coverage – Company Reimbursement
iii. Side C Coverage – Entity Coverage

• The CEO of a company that is at risk of insolvency has to sell the company’s assets to avoid insolvency.
• Shareholders allege a breach in fiduciary duty and lodge a claim against the board of directors arguing there was insufficient supervision of the asset sale. Therefore, the director’s actions were inadequate in avoiding insolvency.
• The corporation is unable to indemnify the board of directors as it is insolvent. Side A coverage would directly indemnify the directors.

It’s important to note that Side B coverage comes with a ‘deductible’, also referred to as an excess.

• A disgruntled employee makes a claim against a company officer and effectively sues for alleged misconduct.
• The company covers the costs of court proceedings for its company officer throughout the proceeding.
• The company then approaches its D&O insurer to reimburse the costs it’s incurred to indemnify its officer. In doing, the company helps protect its balance sheet and is required to pay a deductible as set out in the policy terms and conditions.

Australia’s ever-increasing regulatory system, and most recently the unpredictable impacts of COVID-19, have seen corporations operating in an environment with frequent regulatory change and increased regulatory oversight. The rise in Royal Commissions and public awareness has also brought about heightened community scrutiny, which opens more windows of opportunity for claims and investigations brought against not only directors and officers but claims specific to securities law against the company, too.

It’s important to note that the scope of protection that Side C offers is different between policies that are for private companies and those for publicly traded companies.

For private companies, Side C coverage provides entity coverage for lawsuits against the corporation itself. This also includes not-for-profit organisations or strata corporations such as homeowner associations. Publicly traded companies however benefit from Side C coverage’s protections for its own liability arising from securities claims.

• Consider an organisation that became a publicly listed company and had recently undergone a significant merger by acquiring a smaller competitor.
• It becomes apparent to shareholders that there was insufficient communication regarding the merger and investors were not provided timely access to information about the company; information which could have affected its market price or share value.
• A class action is raised that alleges the company breached its continuous disclosure obligations and results in a securities claim.

The company would then make a claim under its D&O policy, where Side C would cover the expenses associated with defending itself throughout the class action. This helps protect the entity’s balance sheet.

• Personal Conduct Exclusion
  This exclusion is part of every Directors and Officers policy and excludes dishonest or fraudulent acts committed by an insured. It can extend to exclude intentional violation or breach of law/regulation and unfair profit or gain to which an insured has no legal entitlement. It is worth noting that most policies defend the Directors & Officers until final adjudication.. Policies typically include severability clauses that isolate the Wrongful Act or conduct by one insured so that it is not imputed to other insureds.

• Bodily Injury/Property Damage
  The policy will not respond to a claim for Bodily Injury & Property Damage claim as this exposure is typically covered by a Public Liability policy.  This exclusion may have a write back (gives coverage back) for Defence Costs, Employment-Related Wrongful Acts and Security Claims.

• Prior & Pending Exclusion
  Prior & Pending Exclusion excludes cover for any pending or prior litigation involving the Company that has begun before the Prior & Pending date of the policy.

• Insured Versus Insured for USA Claims
  There are many variations to this exclusion, but the main purpose is to exclude cover for dispute between insureds / the company and an insured in the USA.

• Future Offering Exclusion
  This exclusion states that any future offering of securities is excluded.  There can be amendments to this exclusion to include a threshold and jurisdiction limitation. This is important for the managers of the D&O insurance, as they must notify the broker/insurer to ensure future capital raisings are underwritten and can be covered.

• Major Shareholder Exclusion
  This exclusion has a threshold for major shareholders (i.e. 10/15/20%) and the policy will not cover a claim brought by a major shareholder against the Directors & Officers. This exclusion may havea requirement that the major shareholder has a holding above a threshold together with a board position to trigger the exclusion.

• Retroactive Date Exclusion
  This excludes any wrongful act committed or alleged to have been committed prior to the inception of the policy. This is a way for insurers to exclude past acts and make the policy only forward-looking.

• Insolvency Exclusion
  This exclusion removes any coverage for claims arising out of insolvency. This exclusion can typically be removed if the company shows they are in a good financial position and can internally fund the company’s operations for 12-18+ months.

• Political Risks Exclusion
  This excludes claims connected with nationalisation of a Company or any part of a Company’s business. It will also exclude the seizure, reversion, appropriation of a company’s assets by a governing body.

• Failure to Maintain Insurance
  This excludes any claim which alleges the mismanagement of the company’s insurance program.

• Professional Services Exclusion
  This exclusion removes coverage in connection to the performance of or failure to perform professional services.

• Pollution/Environmental Exclusion
  This excludes any claim or allegation due to pollution or environmental event.

Some of the legal obligations a director must follow include the duty to:

• Act in good faith and for a proper purpose
• use care and diligence
• avoid improper use of information
• avoid abusing the use of position
• disclose certain conflicts of interest

For a comprehensive list of directors duties, see the Corporations Act 2001.

• Consumer and competition legislation aims to protect consumers by promoting competition and fair trading and relates to almost all areas of business activity. If a provision of this Act is contravened by a company, there’s a risk that the director will be held personally liable.

• WHS legislation. Each state has their own WHS laws that businesses must follow. WHS exists to protect the health and safety of workers and members of the public. If a company is found to have contravened the Act, the director may also be held accountable unless they can prove that they undertook all necessary due diligence.

Breaches resulting in Civil Penalties

• Breach of duty of care & diligence;
• Breach of duty to act in good faith in the best interests of the company and for a proper purpose;
• Breach of duty not to misuse position or information;
• Related party rules;
• Insolvent trading;
• Insider trading;
• Breaches of continuous disclosure.

• Contravention of duties of good faith;
• Abuse of position;
• Improper use of information;
• Where there is conduct involving an element of recklessness or intentional dishonesty.

Most D&O insurance policies include a general exclusion for claims:

• arising out of director’s fraud & dishonesty;
• resulting from a contravention or prohibition of section 199B of the Corporations Act ;
• where the fines and monetary penalties arise from a reckless act or omission; and
• matters which are generally uninsurable under applicable laws.

When Indemnities for liabilities are not allowed (other than legal costs)

A company or a related company must not indemnify a person (directly or through an interposed entity) against any of the following liabilities incurred as a director of the company:

• a liability owed to the company or a related company;
• a liability to pay a pecuniary penalty or compensation ordered under the Corporations Act; or
• a liability that did not arise out of conduct in good faith.

A key concern for directors when defending an action is whether the company can assist with indemnity for legal costs. S199A(3) prohibits this in the following circumstances:

A company or a related company must not indemnify a person against legal costs incurred in defending an action for a liability incurred as a director of the company if:

• the director is found to have a liability for which the company may not indemnify them, as outlined above;
• the director is found guilty in criminal proceedings;
• ASIC or a liquidator brings the proceedings, and the grounds for making the order are established (for example actions by ASIC to disqualify a director); or
• the costs are incurred in connection with an action brought by a director for relief under the Corporations Act, and the relief is denied.

• wilful breaches of duty; or
• misuse of their position (s 182 of the Corporations Act) or misuse of information (s 183 of the Corporations Act).

In 2020 New South Wales amended their WHS Act to include the prohibition of entering into an insurance policy that intends to indemnify the person from their liability to pay a fine or an offence under the WHS Act. This law extends to insurers, making it illegal to issue a policy covering WHS breaches. Western Australia has followed suit by overhauling their Act, prohibiting insurance against WHS breaches.

WA’s Work Health and Safety Act 2020 brings with it the creation of the criminal offence, Industrial Manslaughter, which requires the following elements:

• A health and safety duty on the part of the PCBU; and
• the person engages in conduct which causes the death of an individual; and
• the conduct constitutes a failure to comply with the health and safety duty; and
• the person engages in the conduct knowing the conduct was likely to cause the death of an individual and in disregard of the likelihood.

Directors have a duty to exercise due diligence to ensure a PCBU (Person Conducting a Business or Undertaking) complies with their obligations. Basically, the director is responsible for ensuring the company is keeping its workers safe. The duty imposed is a positive duty requiring a proactive approach by directors to ensure they comply with the obligations under the legislation. Failure to comply now brings harsher consequences with the prohibition of insurance and introduction of Industrial Manslaughter, with a maximum imprisonment term of 20 years for individuals and a fine of $5M, or a $10M find for a Body Corporate.

• Side A
  responds when a company is unable to indemnify its directors and officers. This part would respond, for instance, when the company is insolvent. Side A has no self-insured retention or deductible.

• Side B
  reimburses a company for its indemnification obligation to its directors and officers. Side B generally has a self-insured retention or deductible that is paid first.

• Side C
  covers the corporation when it is sued alongside its directors and officers. Side C is typically subject to either a self-insured retention or deductible. Side C coverage is sometimes also referred to as “balance sheet protection”. Nowadays Side C has become much more difficult to obtain for new policies and even on renewals as some insurers are not offering the Side C component due to increasing class actions and claims.

➤ Percentage Owned by Insiders
Where directors and significant associated shareholders hold a large percentage of the issued share capital this may affect the decision on the limit. If directors hold a large proportion of the issued capital it may be argued that this reduces the scope and potential quantum of damages by claimants. Generally D&O insurers will include an endorsement aimed at excluding internal disputes between insiders for example the major shareholder exclusion (sometimes with a board seat). This excludes cover for the major shareholder suing the board or the company as they are expected to be helping direct the company and would be typically considered insiders.

➤ Peer Group
Where possible (because generally the policy information is confidential) it is useful to refer to the limits that companies in the peer group are purchasing for a guide to what limit is appropriate. KBI has access to peer group data that can benefit boards when picking a limit.

➤ Regulatory Framework
At any particular time, certain companies are in the spotlight, whether due to Royal Commissions, ASIC investigation or Parliamentary inquiries. This may influence the board’s decision as to the size of the limit. An example of this is companies involved in the Aged Care or the Banking Industry post Royal Commissions.

➤ Company’s Capacity to Retain Risk
The company’s particular risk appetite and attitude to risk management is relevant to the choice of limit. Retained risk can be considered with reference to the level of deductible applied or to the overall limit of cover.

➤ Merger & Acquisition Exposure
The company’s growth plans may affect the limit decision. If the company’s strategy includes growth by acquisition or places them in circumstances where they may be subject to merger or acquisition themselves, they may consider a higher limit as these are inherently riskier activities.

➤ Cost / Budget
This can be linked to the company’s capacity to retain risk and also the cost per $1mil of coverage. With insurers’ pricing fluctuating as we enter a harder insurance market, the limit chosen often becomes a commercial decision of what limit of risk transfer is viable for the board/company.

➤ High / Low Risk Industry or Jurisdiction
The industry the company is in plays an important part in the decision process. Some industries are inherently more subject to litigation or open to attack than others. Equally if the company operates in jurisdictions that are considered more risky or litigious, there may be a sound basis for a higher limit.

➤ Availability
The Australian D&O market has hardened considerably over the last 18-24 months. A number of insurers have withdrawn from the market, restricted capacity / limits they are willing to offer and reduced their appetite for certain risk sectors. This means that even if the company has decided on the limit it wishes to purchase or the limits it has historically carried, there may be a limited number of markets available with the capacity to assist. With the hard market likely to continue well into 2021 the availability of D&O will be a key factor in obtaining the limit the Board wants.

• an alteration to an organisation’s ownership, through a transaction for example an acquisition,
• merger or
• change in the composition of the board of directors or
• change in shareholding of the company.

• Why did we choose that structure and limit?

• Has our strategy changed since last year’s insurance was put in place?

• Is that structure and limit still appropriate for this year’s renewal taking into account any changes to the strategy, our business or any new markets?

• What does the current D&O Insurance market look like and how will that affect the D&O insurance renewal terms and premium we might be able to secure?

• Governance considerations – key policies and overall governance culture in the organisation. By providing detailed information about the internal processes and governance structures in place in the organization you can potentially avoid the need for some endorsements; for example, Bribery and Corruption.

• Board composition -highlight the experience of directors with proven track records on other companies and particular governance skills;

• Positive milestones achieved in the course of business and whether these change the nature of the risk.

The Council would encourage entities to consider whether they have a material exposure to climate change risk by reference to the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”) and, if they do, to consider making the disclosures recommended by the TCFD.

• Governance;
• Strategy;
• Risk management; and
• Metrics and targets to be included in traditional financial accounts.

Companies who choose to make this disclosure should analyse the potential impact of a number of climate related scenarios (one example being rising temperatures) on the organisation and refer to the plans adopted to mitigate against the risks.

Many companies are leading the charge with their TCFD reporting in financial disclosures, as well as aligning executive remuneration and key performance targets with the overall strategy. Institutional investors who are members of collaborative groups, such as the Investor Group on Climate Change (https://igcc.org.au/) and Climate Action 100+ (http://www.climateaction100.org/), are engaging with companies to require them to consider the impact of climate change and release appropriate and comprehensive disclosure about these risks.

• Consider Climate Risk – continually understand and assess existing and emerging risks for both the short term and long term;

• Adopt strong and effective Corporate Governance tools – transparency is paramount. Where a climate risk is material, Boards need to consider disclosing the company’s governance and risk management practices around climate risk;

• Comply with the law – In the company’s operating and financial review, ASIC considers that where climate risk could affect entity’s achievement of its financial performance the law requires it be discussed. Preparers of disclosure documents should consider the relevant company’s exposure to climate risk as part of their due diligence and if material, disclosure needs to be concise and clear;

• Disclose useful information to Investors – it is recommended that listed companies consider disclosing climate separate to other general risk categories i.e. environmental and regulatory risk.

In a similar vein, with the introduction of the Modern Slavery Act, we believe that retail and institutional investors will be expecting enhanced disclosure by the larger companies obligated to report in accordance with the legislation. However, this will place pressure on smaller Australian listed entities who have any exposure through their supply chain and/or their operations, to make appropriate and comprehensive disclosure. This will then demonstrate that their board is considering this an important business risk and is giving clear guidance on the due diligence conducted by the company, as well as the risk mitigation strategies the company is adopting. Failure to do so will most likely result in increasing scrutiny by shareholders, regulators and other interested parties. Any public censure by regulators or queries and corresponding share price drops may well expose the company to the threat of a derivative class action.

Corrs Chambers Westgarth, in its insight “A new era of climate change litigation in Australia”, identified the key matters which have historically been litigated on (and will continue to be litigated on). These included:

• oil and gas exploration;
• expansion or construction of facilities for energy-intensive manufacturing; and
• changes to land use.”

In the event that investors suffer a loss which they perceive could be attributed to inadequate disclosure by the board/management of their climate change risks, we believe this could result in a D&O claim. The claim could arise in a number of scenarios:

• the non-disclosure of climate change / human rights risks to the market, resulting in action by regulators;
• inadequate steps taken by the Board to mitigate the risks, resulting in a loss; and
• negative implications on company valuation due to failure to take account of these risks and any resulting consequences.

D&O Insurance is complex and the changing governance framework is making it even more so. Insurers respond to emerging risks quickly and it’s important to stay on top of the important considerations for your D&O policy and keep your broker informed.