Directors and Officers insurance risks, errors and claims
A D&O insurance policy generally:
- Reimburses the company for amounts payable by the company to directors; and
- Provides direct coverage to directors for liabilities which are not indemnified by the company.
D&O insurance typically provides cover for:
- Defence costs and investigative costs;
- Costs to appear at inquiries and investigations; and
- Judgments and settlements.
Directors should be aware that there is a relationship between quality of cover and price (premium). This can mean that the interests of the company and the director differ: generally, the better the cover for directors, the more it will cost the company.
Directors and Officers insurance Legal limits
The company may pay D&O insurance premiums on behalf of a director, provided that the policy is on commercial terms and with an independent insurer, even though it insures risks that the company itself may not indemnify directors for.
However, Australian companies are prohibited by law (Corporations Act 2001 s199B) from paying or agreeing to pay the premium for insurance of a director or officer against a liability (other than one for legal costs) arising out of:
- A wilful breach of duty in relation to the company.
- A director’s improper use of position.
- A director’s improper use of information.
Accordingly, most companies purchase a D&O insurance policy that excludes the above liabilities, that is wilful breach of duty, misuse of position or misuse of information.
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Legal defence costs
Ideally a D&O insurance policy provides that an insurer will pay for ‘reasonable’ defence costs. Careful consideration should be given to any policy that:
- Provides for ‘reasonable and necessary’ defence costs as this may lead to disputes about which costs are ‘necessary’; and/or
- Sets a monetary cap on the fees payable, such as a cap per hour, on a lawyer as this can restrict the quality of the lawyer available to you if a claim is made against you.
Legal costs of investigations and inquiries
Inquiries and investigations are significant for directors as they may lead to adverse findings and even civil or criminal proceedings.
Cover for costs incurred preparing for, attending and providing information to an investigation or inquiry is essential. Ideally, the policy will also cover personal expenses such as travel and accommodation, which may be significant if the investigation or inquiry is held interstate.
A careful assessment should be made of a policy that only covers defence costs for investigations and inquiries where the director has committed a wrongful act. Ideally, your policy will cover defence costs for investigations even in the early stages of the investigation. Investigations can be far reaching and involve directors who are not involved in any wrongful act. For example, a regulator may investigate all the directors of a company, even if only one actually committed a wrongful act.
Advancement of legal costs
It is common for insurers not to advance defence costs until an insurer has made a decision to accept cover. This can have a negative impact on director who needs funds immediately to cover such costs.
Ideally, a D&O insurance policy:
- Provides for the automatic advance of defence costs as soon as a claim is notified until an insurer rejects a claim, even if misconduct has been alleged but not yet proven or admitted; and
- Has no sub-limit for advancement of defence costs.
A careful assessment should be made of a D&O insurance policy that leaves advancement of defence costs to the insurer’s discretion or has a sub-limit for the advancement of defence costs.
Order of payment and allocation of costs
A D&O insurance policy will typically contain an ‘order of payment’ clause which specifies the order in which amounts will be allocated between insured persons and insured entities. Ideally such clauses give preference to directors over the insured entity.
If proceedings are brought against, for example, directors and an uninsured company together, then it can be unclear for whom the defence costs are incurred. You should carefully consider the ‘allocation’ clause that will govern the apportionment of costs between different parties.
The insurer is entitled to select legal representatives and exercise control over conduct of proceedings in many D&O insurance policies.
Policies with a broad scope of cover that may be considered ‘top end’ may expressly provide that the insurer may not settle proceedings without the consent of the director. Ideally, such a policy would provide that a director may choose their own legal representatives.