A guide for SMEs and NFPs purchasing insurance

Do Start early. The company should aim to start at least 3 months prior to the expiry of current cover or when you want new cover to commence.
Don't Forget to ensure appropriate indemnity arrangements are in place. Without these, the reimbursement section of the policy may not operate.
Do Carefully select a broker. A good insurance broker should be able to source and place appropriate D&O insurance for the company, and assist if the company makes a claim. You may wish to consider:
  • Specific D&O insurance expertise - as D&O insurance is a highly technical area of insurance, a broker with D&O insurance expertise is recommended.
  • References or recommendations given to you by other SMEs. It is suggested that you select a broker based on a recommendation, rather than locating your broker by reference to the 'Yellow Pages' just conducting a basic internet search or selecting a broker that is located close to you, or just based on location. D&O insurance is a technical niche insurance product. Choose an expert in this type of insurance to advise you.
  • How the broker will be remunerated, including commissions. The broker is required to disclose this by law.
  • Experience in your industry and experience (and qualifications) of the individual who will be managing your account.
Don't Forget to provide accurate proposal/renewal information. The company may be asked to provide details such as:
  • Activities of the company and any key issues facing the company
  • Industry
  • Financial results of the company
  • Board oversight/governance
  • Risk management measures
Do Disclose every matter that you know, or could reasonably be expected to know, is relevant to the insurer’s decision whether to accept the risk of insurance, and if so, on what terms. This is called the legal ‘duty of disclosure’. If you fail to comply with your duty of disclosure, the insurer may be entitled to reduce its liability under the policy if you make a claim, or may cancel the insurance policy entirely.
Don't Simply leave the review of D&O insurance to someone else. The insurance broker should obtain alternative quotes and provide a recommendation. Together with other directors, you should compare and assess them, thinking about:
  • Terms and conditions (see D&O insurance checklist)
  • Continuity of cover from previous year
  • Financial position of the insurer
  • Cost (premium and excesses)
Do Be alert to the fact that the company and directors may have different interests. The company may be inclined to purchase the cheapest cover. Sometimes, a policy that comes at a lower cost will be cheaper because the cover is not as good.

Notifying your broker

Don’t Put ‘your head in the sand’ if you receive a claim. If you do not notify the insurer of such claims or circumstances, the insurer may not be bound to provide you with an indemnity under the policy.
Do Notify the broker immediately of a claim against the insured person.

Some policies also require you to notify any circumstance which may give rise to a claim under the policy. Early notification reduces the chance of a dispute between you, the company and the insurer about the timing of a notification and its adequacy.
Don't

Decide that ‘taking no action’ is your best strategy. Sometimes people decide not to notify their insurer of a claim because they:

  • Think that if they make a claim their premium will go up. When they seek to renew their policy or propose to purchase a policy from another insurer, they are required to disclose any claims to that insurer, so this will impact on their premium.
  • Predict that a court will not find them liable in proceedings that have been brought against them.
  • Guess that the claim would not be higher than the excess.
Do Remember that as an insured person, you are individually under an obligation to notify the insurer.
Don't Forget to notify the insurer if there are any material changes to risks such as a ‘change in control’ of the company.

Matrix of Standard Business Liability Insurances

This matrix sets out a short summary of the type of policy and coverage provided by liability insurances which go to assist businesses in managing the risk they have to third parties in respect of their business activities.

The matrix is a high level summary and full details of the applicable coverage, limits of liability and exclusions should be obtained from the insurer or the broker or agent used by you in relation to the policy.

Policy Type Short description of what is covered Occurrence/claims made1
Public Liability This policy covers the company in relation to property damage and personal injury (other than that covered by workers compensation and compulsory motor accident insurance arrangements) Usually an occurrence based policy
Workers Compensation Covers liability to employees under State and Territory workers compensation legislation Occurrence based
Motor accident or compulsory third party motor insurance Covers liability for personal injury arising out of the use of motor vehicles Occurrence based
Special property damage covers such as comprehensive motor vehicle Includes cover to damage to the firm's vehicles and also liability for damage to other motor vehicles Occurrence based
Directors and Officers liability insurance The prime cover covers directors' and officers' liabilities to the company or others for a breach of duty (Side A) and indemnifies the company in circumstances where the company may, or is obliged to indemnify the director or officer for the loss (Side B). The policy also sometimes provides cover directly to the company in respect of employment practices or liability under securities legislation such as disclosure to the ASX or others (Side C). Claims made
Professional indemnity This policy is applicable to companies providing professional services (including advice) and protects the firm in respect of liability for the services provided by the firm. Claims made
Employment practices liability This cover provides the company cover in respect of claims by employees arising out of such things as discrimination, harassment, wrongful termination etc. Claims made
Product liability and product recall This cover is of various types depending on the types of product manufactured or distributed by the firm but the policies can provide varying levels of cover for product defects and for the costs of recalls. Claims made

1An occurrence policy provides protection in respect of events that give rise to a loss in the policy period whereas a claims made policy provides protection in relation to claims brought against the firm in the policy period and maybe extended to cover claims arising from facts and circumstances that may give rise to a claim notified during the policy period. 

More resources

Management liability insurance for SMEs

  • Detailed information on SME claims trends in D&O insurance amongst other forms of insurance can be found in AON’s Quarterly Market Report for SMEs 2010.
  • The National Insurance Brokers Association is an industry body which maintains a list of insurance brokers.
  • Various State and Territory Departments of Fair Trading (or their equivalent) provide information specifically targeted at SMEs. For example, the Small Business part of the NSW Government Department of Industry and Investment website is designed for people starting, running or growing a small business. It contains a Small Business Toolkit which includes information on insurance.

Association liability insurance for NFPs

  • The Community Insurance & Risk Management Centre provides community groups with information, support and resources on risk management and insurance.